You should include all of your unsecured debts in a Bankruptcy. Family debt (debts owed to family members) can create problems however, especially if they are relying on regular payments from you.
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- Paying family debt during Bankruptcy
- Pay back family before going Bankrupt
- Pay back family after Bankruptcy
- Include family debt in your Bankruptcy
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Paying family debt during Bankruptcy
Once Bankrupt you will agree a reasonable living expenditure budget with the official receiver (OR). Any money you have left over will have to be paid to the OR and be put towards repaying all of your creditors.
You will not be allowed to include a budget within your expenditures for paying friends or family debt as this would be seen as a preferential payment.
The only way that you can continue to pay your friends and family is if you can make any savings out of your allowable expenses. Any savings you make are your to use as you like, so you might be able to make payments to a family debt.
Maintaining debt repayments to friends and family by making cuts to your other living expenses will not be easy. You should not rely on being able to do this.
Pay back family before going Bankrupt
If you are thinking of declaring bankruptcy you might consider trying to pay off the debt you owe to your friends or family before hand. You might have the possibility to do this with any cash or savings money you have available. However you must not do this.
If you pay off any creditor in this way and then go bankrupt within the next two years this is a preferential payment to that creditor. The Official Receiver would then be within their rights to approach whomever you had paid and demand the money be paid back to them.
It is also likely that the OR would extend the period of your Bankruptcy with a Bankruptcy Restrictions Undertaking (BRU) even if you had made the payment without realising that it was wrong to do so.
If you pay back a debt owed to a friend or family member preferentially before going bankrupt they can be forced to repay the money they have received with legal action if necessary.
Pay back family after Bankruptcy
Ideally waiting until your bankruptcy is over is the best way to deal with debts to friends or family. Once you are discharged you can pay them back in full quite legally. This is the case even if you included them in your bankruptcy.
If you can do this then you are likely to be able to pay them back quite quickly as you will have no other debts to pay.
Of course this is not always an option especially if they cannot to afford to wait for their debt to be repaid.
If you get an IPA you have to continue paying towards your debt after you are discharged. You might have to wait until these payments are finished before you could afford to pay back family debt.
Include family debt in your bankruptcy
At the end of the day if you owe a friend or family member money and do not want to pay them, bankruptcy will protect you. You are allowed to included this type of debt in bankruptcy.
They will be treated the same as all the other creditors. They are unlikely get the full amount they are owed by you and may receive nothing at all.
If you include them, they will be informed of the situation. You may not want this for various reasons, but this should not be a reason for you to avoid or postpone a debt solution.
Do you have family debts? Are you considering Bankruptcy? Contact us to discuss your options (0800 077 6180).
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Hi
I am thinking about going bankrupt before moving abroad. I owe about £8000 on credit cards and a bank overdraft. I also owe £7000 to a friend and my Mum.
Would I be able use available money on my outstanding credit cards to pay them off or would this be treated as a fraud. I haven’t got any formal credit agreement with them they just been helping me with my everyday expenses for some time.
I cannot see any other way of paying them off apart from using credit cards. Could you please kindly advise how would this be seen before going for the bankruptcy?
Hi Pavel
I am afraid you will not be able to pay off your friend or Mum using your credit cards.
The issue is the Official Receiver will have access to your credit file. They will see the extra £7000 balance going onto the cards and ask you to explain what the money was spent on. You will have to tell the truth and say you paid a debt to friends / family. The OR will then say this was a preferential payment. They will write to your friend / Mum and demand the money is paid back. They will use court action to enforce repayment if necessary.
I am sure you do not want this issue. As such you will not be able to repay them in this way. You can still repay them after you go bankrupt but this will have to be from any money you can earn / get together after you move.