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How bankruptcy affects me

Bankruptcy and loans to family and friends

If you've had a debt problem for some time, you may have had to rely on money borrowed from family and friends that you still need to pay back. This can become quite complicated when you go bankrupt, especially if you’ve:

  • 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.

Owing money to family and friends is a common issue that many of our bankruptcy clients face. It’s important  that your relationships aren’t compromised due to the restrictions bankruptcy can place on you.

The rules around debt relief orders (DRO) have changed. These changes could benefit those considering an insolvency solution like bankruptcy. Please take a look at the changes, as for some people a DRO will be a cheaper alternative to full bankruptcy.

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What are the bankruptcy rules over loans from family and friends?

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

If you’ve paid money back to someone before bankruptcy

The official receiver (OR) who oversees your bankruptcy may ask that person to give the payments back if:

  • You showed preferential treatment by paying this person back instead of paying something to all of 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 such as 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 the payment in the six months before your bankruptcy.

The OR may also impose a bankruptcy restriction undertaking or order, extending the length of your bankruptcy restrictions.

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 you’re instructed to make payments to the OR 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.

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 shared 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. The OR may also impose a bankruptcy restriction undertaking or order on you, extending the length of your bankruptcy restrictions.

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 within the last five years, or to a creditor or third party you don’t know within two years.

These time limits don't apply if the OR can show you were trying to hide money from your creditors when you gave away or sold the asset.

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. You can find this in in sections 3.5 and 3.6 of your bankruptcy online forms.

You must answer any questions the Official Receiver asks 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. Being honest about your situation now can prevent further setbacks such as longer restrictions being placed on your bankruptcy. 

Free bankruptcy advice

If you’re considering bankruptcy, make sure you use our online debt advice tool first. You’ll get an assessment of your financial situation and an expert recommendation on how best to deal with your debt problem.