When Family Gets Involved in Bankruptcy

There is nothing unusual about a debtor having a parent, brother, sister, son, daughter, aunt, uncle, niece, nephew, grandparent, or grandchild in a family role and financial role. For some, involvement becomes deeper when hard times come. Here is a list of some common roles in which family members are seen in a bankruptcy proceeding:

1. Co-obligor/co-signer. When a family member has also signed for a loan, and shares liability for repayment, he or she is affected by the debtor's bankruptcy. The co-signer remains liable for the debt, and if the debtor receives a discharge, the co-signer may become the only individual liable on the debt. Chapter 13 provides a co-debtor stay which offers some protection for a co-signer, particularly if the debtor proposes to pay off the debt within the chapter 13 plan.
2. Household member. Family members, even extended family members, routinely reside with the debtor and form a single economic unit. The income contributions and expense impacts of these household family members impact means testing for chapter 7 eligibility and chapter 13 payment requirements.
3. Transferee. Debtors routinely give or sell property to family, including in the years and months prior to bankruptcy. Such a transfer might be considered a fraudulent transfer if it depleted the debtor's assets or considered a preferential transfer if it paid off a family loan. Other transfers may be perfectly legitimate. The bankruptcy code has special requirements concerning transfers to family members, and the risk of a family member being sued by the bankruptcy trustee may be a concern to some debtors.
4. Landlord/Tenant. Whether just a room or an entire house, debtors are frequently in landlord-tenant relationships with family members. Documentation of these relationships and their fairness are valuable in the bankruptcy process.
5. Co-owner. Debtors often own real property, cars, or business with family members. The extent of the debtor's ownership interest controls the value of the asset in the bankruptcy, not the full market value. However, sometimes conflict will arise when a trustee decides to sell jointly owned property.
6. Pre-petition Creditor. Loans from family members are treated similarly to other loans, and unsecured loans from family members are generally wiped out by the bankruptcy discharge. A debtor can voluntarily pay a discharged loan to a family member, if they choose.
7. Rescue Financier. When a debtor needs a substantial amount of cash to settle a dispute with a trustee or to redeem the value of personal property, family members are among most common source of these funds when other loans might not be available.