A Multiple Choice Question on Discharging Unsecured Debt

Here’s a multiple choice question for you. Let’s say you have more debt than you can pay down, but one of your creditors is a family member. You want to file bankruptcy, but at the same time you don’t want to alienate your kin. Which of the following three options do you choose?

A. File bankruptcy and omit the family member’s loan from your bankruptcy petition?

B. File bankruptcy, include the family member’s loan, but claim it was a gift and not a loan? or

C. File bankruptcy, include the family member’s loan, and discharge it in bankruptcy?

The only correct answer is (C). Why?

(A) is wrong because you must list all your debts, assets, and income on your bankruptcy petition. Omitting any of these is fraud because when you sign a bankruptcy petition you are making a legal declaration that the contents are accurate to the best of your knowledge lest you be guilty of perjury or otherwise denied a discharge. Many debtors try to do this when trying to handle the family member’s loan. It will fail. Don’t do that.

(B) is also incorrect, but for a subtler reason. If you claim the loan was a gift the bankruptcy Trustee will consider it an asset, and it will be unlikely to be subject to an exemption. This means the Trustee can take some of your property and sell it to pay off one of your other creditors. You want to leave bankruptcy with as many of your assets as possible. Also, if the “gift” brought your income within the last six months over the income level determined by the Chapter 7 means test, you will have to file in Chapter 13. This is also something you do not want to do.

(C) is correct. You may be thinking, “But this means that the family member will be angry with me for discharging the debt!” Yes and no. Yes, the debt is discharged. Discharge means that the creditor cannot enforce your payment on the loan. This includes using legal mechanisms against you such as sending you a bill, collecting on the debt, or suing you for the remaining balance. None of this prohibits you from voluntarily resuming payment to the family member after discharge. This way you can prevent family discord while getting your finances in order.

For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation by calling 702-903-1354.