Friends and family debt and bankruptcy
- 03 Feb 2022
Money you owe to friends and family does not have to be included if you go bankrupt. They don’t need to be involved. However, continuing to repay the money you owe them while you are bankrupt will be difficult.
Included in this article:
- Can debt owed to friends and family be left out of bankruptcy?
- What if pay off friends and family debt before you go bankrupt?
- Can you pay people you know afterwards?
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Can debt owed to friends and family be left out of bankruptcy?
Money you owe to your friends and family can be left out if you go bankrupt. Of course it can be included. But you don’t have to involve them if you don’t want to. You just don’t list them as being owed money in your application.
The debt will not come to the Official Receiver’s attention because it will not be listed on your credit file.
That said, if you chose to leave them out, it is unlikely that you will be able to continue paying them back while you are bankrupt. Of course, you will not want to let them down. They may be relying on you to keep paying them. But finding spare money to do this will be difficult.
You are not allowed to included a specific allowance for repayment of friends or family debts in your living expenses budget. The only way you might be able to continue paying them is if you can make savings from the expenses budget which is allowed and use this money instead. But if the amount is significant, this may not be possible.
Ideally, you should speak to the person you owe money to and ask them whether you can stop paying them while you are bankrupt. Once you are discharged (after 12 months) you can then start paying them again (hopefully at an even greater rate).
After you go bankrupt, your creditors are prevented from taking legal action against you in the future to force you to repay what you owe them. This includes debt owed to friend or family members.
What if you pay off friends and family debt before you go bankrupt?
You might think it would be a good idea pay off any money you owe to friends and family before you go bankrupt. That way, they don’t need to be involved in the process. In fact, this is normally be a very bad idea. If the amount is significant, it would be what is known as a preferential payment.
A preferential payment is paying off debt to one person with money that all your creditors could have benefited from. If you do this within 2 years of going bankrupt, the Official Receiver can demand that the money is returned. If the person who received the payment refuses to give it back, they themselves can be taken to court over it.
Repaying a debt to friends or family is still classed as preferential even if you did not realise it would be an issue. If you go bankrupt within 2 years of making the payment, it will be a problem whether you knew anything about preferential payments at the time or not.
Don’t give away something you own (like your car) to pay a debt owed to friends or family before going bankrupt. If you do this within 2 years of the start date, it will still be treated as a preferential payment. The item will have to be returned.
Are you allowed to pay people you know after your bankruptcy has ended?
After your bankruptcy has ended (i.e when you have been discharged) your debts are written off. However, you are still allowed to repay anyone you own money to if you like. This means you can still pay debt you owe to friends and family.
You can restart monthly payments to them. Alternatively you are now allowed raise money to pay them in other ways such as taking cash from a pension or selling an asset.
Bear in mind that you should be in a position to pay them more quickly than before you went bankrupt. This is because you no longer have the pressure of any other debts.
Paying back people you know after you are discharged from bankruptcy is a much better option than struggling to maintain payments to them while you are bankrupt.
Owe money to friends and family and want to discuss whether bankruptcy is right for you? Give us a call (0800 044 3194) or complete the form below and we’ll call you.