How are personal loans treated in Wilmington bankruptcy?
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Bankruptcy can be the perfect way to climb out of unmanageable debt. A discharge in Chapter 7 means ditching unsecured debt while Chapter 13 leaves you paying pennies on the dollar on unsecured debt in many instances. However, if you have personal loans owed to friends and family when you go into Wilmington bankruptcy, you may be torn about how to proceed.
Unsecured vs. secured debt
Secured debt is attached to an asset such as a home with a mortgage or vehicle with an auto loan. In Chapter 7, if you’re current on secured debt, you can shed unsecured debt and usually maintain a secured asset loan so long as you're not behind on payments and the equity in the item doesn’t exceed North Carolina bankruptcy exemptions.
In Chapter 13, with secured debt, there’s less concern with equity. If you’re delinquent on secured debt, you can include the past-due in your repayment plan, protect the asset from foreclosure or repossession, and be current on that debt by the end of your bankruptcy.
Unsecured debt is that which has no asset supporting it. Credit card debt, medical bills, and personal loans are all unsecured. Personal loans can be from friends, family, employers, private lenders, or your bank. This debt can be 100% discharged in Chapter 7 or partially/fully discharged in Chapter 13.
Family and friends can’t be treated differently
Although you are clearly more attached to your family and friends than you are to your credit card issuer, the bankruptcy court sees them as equals and lumps them into the same class of debt. Personal loans are just as dischargeable as credit card debt.
When a friend or loved one lets you borrow money, they may expect repayment. If they don’t, it may be more properly classified as a gift. This is something to discuss with your Wilmington bankruptcy attorney. However, if it is a loan, you can’t try and keep it out of the bankruptcy case.
Preferential payments not allowed
In bankruptcy, all your creditors must be treated equally. You can’t pick and choose between them. That means if you know you’re filing bankruptcy soon and want to pay back a loan from your Aunt Jessica, you should not. The court may latch onto this and make trouble.
The bankruptcy trustee assigned to your case has the power to “look back” at your finances in the months or years before the date you filed. If they see payments to unsecured creditors before bankruptcy that raise a red flag, the trustee may demand return of the money.
If the trustee in your Wilmington bankruptcy case decides it was a preferential payment, they can make the payee give it back, and the trustee can pay other creditors with it. That could be very embarrassing, particularly if handing over the money to the trustee causes them financial hardship.
Those planning to file bankruptcy shouldn’t try and sneak in a preferential payment. You can’t pick and choose between creditors.
How to deal with personal loans in bankruptcy
Once you decide to file bankruptcy, you must come to grips with the fact that any personal loans must be part of your Wilmington bankruptcy. Once you’ve completed your Wilmington bankruptcy, later down the road, you can always decide to make good on the funds given you from friends and family, but you can’t accommodate it in a Chapter 7 bankruptcy.
Always remember to be 100% honest and transparent with your North Carolina bankruptcy lawyer. Tell them about all your debt, income, and assets. Don’t try and hide anything or your case could be kicked from the court and your shot at debt relief squandered. Bankruptcy is an excellent opportunity for meaningful debt relief, but only if you play by the rules.
To explore the life-changing benefits of bankruptcy, read reviews from our satisfied clients, then contact the Law Offices of John T. Orcutt. Call 1-888-234-4181 to schedule a free Wilmington bankruptcy consultation at one of our convenient locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.