We aim to make our website as accessible as possible. However if you use a screen reader and require debt advice you may find it easier to phone us instead. Our phone number is 0 8 0 0 1 3 8 1 1 1 1. Freephone (including all mobiles).
StepChange Debt Charity logo
i This solution is only available in England, Wales and Northern Ireland.

How can family & friend loans affect my bankruptcy?

If you've done any of the following, bankruptcy may affect you and the person you know:

  • Paid back a loan to someone you know in the last two years
  • Given away or sold anything of value to someone you know in the last five years
  • Borrowed money from someone and agreed to pay it back after your bankruptcy

If this means bankruptcy will affect someone you know, you may decide bankruptcy isn't right for you at the moment.

Don’t worry though, we can provide our bankruptcy clients expert advice and look at alternative solutions.

What are the bankruptcy rules over the loans?

If you’ve done any of the three things listed above you may need to take action so you or the person you know isn’t impacted by your bankruptcy.

If you’ve paid money back to someone before bankruptcy

If you pay back a loan to someone you know before you go bankrupt, the official receiver (OR) may ask that person to give the payments back if:

  • You showed preferential treatment by paying this person you instead of paying something to all your debts
  • You were aware that you were going to go bankrupt
  • You made the payment within the last two years

The OR refers to payments like these as ‘preferences’.

If the OR asks the person to pay the money back and they refuse, the OR can take court action against them. The OR will use this money to cover some of their own costs and to share out fairly among all of your creditors. This is known as ‘reversing a preference’.

The same applies if you paid a creditor you don’t know personally, but the OR would only reverse the preference if you made payment in the six months before your bankruptcy.

If you plan to pay back money after bankruptcy

Loans to people you know are treated the same as any other loan in bankruptcy.  This means you must stop paying them directly after bankruptcy.

The OR may raise money by selling your assets or by asking you to make payments in the three years after your bankruptcy. If you owe money to people you know, they’ll get a fair share of this money paid to them by the OR.

If the OR asks you to make payments to them after your bankruptcy by setting up an income payment arrangement, they could take court action if you keep paying a loan to someone you know directly.

No legal action can be taken against you by any creditors after your bankruptcy, including people you know. But if you can’t pay back a loan, this may cause personal or family problems. If the loan is small, you could ask the person if you can pay them back in kind, for example by doing some odd jobs or helping them in other ways.

If you've given money or assets away before bankruptcy

If you've given away money or assets to someone you know before you go bankrupt, the OR can ask that person to give them back. The asset will then be sold and the money used towards the OR’s fees and to share out fairly between all of your creditors.

Examples of assets include:

  • Properties
  • Vehicles
  • Other items of value (such as jewellery) 
  • Money, shares or other investments

If you’ve sold an asset to someone you know for less than its true value, the OR can ask the person who bought it to pay back the difference. For example, if you sold a car worth £5,000 to a family member for £3,000, the OR could ask them to pay the £2,000 difference.

Giving away or selling assets like this is known as a ‘transaction at an undervalue’.

If the other person refuses to give the asset back or pay the amount they’ve been asked for, the OR can take them to court.

This can happen with any assets you’ve sold or given away to someone you know with the last five years, or to a creditor you don’t know within two years.

How will the OR know about my payments or assets?

The statement of affairs form you fill in when you go bankrupt asks you about preferences and selling or giving away assets in sections 3.5 and 3.6 of your bankruptcy forms.

You must answer these questions truthfully.

The OR will also look at your financial history in detail after your bankruptcy, including all your bank accounts, and they can contact any of your creditors for extra information. 

The official receiver (OR)

An official receiver will be appointed by the court to administer and investigate your bankruptcy. Once your bankruptcy has been granted the official receiver will arrange an interview over the phone or face to face and they'll take control of any assets you own. 

Helping you become debt free...

“I wish to thank your staff for all the great help they gave me when I was in so much debt.
They were a pillar of support to me.” (Leslie, Essex)

Foundation for Credit Counselling Wade House, Merrion Centre, Leeds, LS2 8NG trading as StepChange Debt Charity and StepChange Debt Charity Scotland. A registered charity no.1016630 and SC046263. It is a limited company registered in England and Wales (company no:2757055). Authorised and regulated by the Financial Conduct Authority.

*This is the average rating of our service based on the StepChange reviews on Feefo by DMP and DRO clients three months into their solution.

© StepChange Debt Charity 2017