You never expected to be in this financial situation, but bankruptcy is definitely looking like it is a possibility in the near future. You’re not happy about defaulting on any of your debt – but not all debts are built alike. The ones that really bother you are the ones that involve your family members or friends.
Maybe your parents gave you seed money for your startup, or maybe your brother gave you a few thousand to help you get into your house. Whatever the situation, you’d really like to pay them back before you file Chapter 7.
Unfortunately, you can’t do that. When it comes to bankruptcy, your creditors have to form a line, and you cannot give any of them preferential treatment.
If you do that, the trustee can simply clawback the money
It’s not pleasant to tell someone you care about that you cannot pay them back, but you would actually put them in a worse position if you tried.
When you file bankruptcy, the trustee put in charge of your case has an immense amount of power and control over your finances.
While you may think that they’re only concerned with what you have and what you owe at the moment you file, the reality is that they can look back at transfers of money and assets for 90 days (or longer, in some situations).
If they detect an improper transfer that indicates preferential treatment to your family member or friend, the trustee can exercise their “clawback” powers and reclaim the money. If your family member or friend has already spent the money or reinvested it, that could be financially disastrous for them – far more so than if you simply don’t repay.
If you know that your financial situation is grim, don’t wait: The sooner you get some legal guidance about your situation, the easier it will be to make informed decisions about your future.