Do I Have to Include Debt That I Owe to Friends or Family If I Go Bankrupt?

If you are making payments to friends or family in respect of money that they have lent you, you will normally not be able to continue to do this if you go bankrupt. We consider what happens to friends and family debt in bankruptcy.

If you declare yourself bankrupt you should include all of your unsecured debts. You are not allowed to protect or treat preferentially any unsecured creditors by keeping them out of the arrangement.

This means that if you owe money to friends and family which they expect to receive payment for on a regular basis, declaring bankruptcy will mean that these payments will generally have to stop.

Friend or family debt can be included within the list of your unsecured creditors and the friend or family member may receive a return from any funds you pay into your bankruptcy in the same way as other creditors.

This may not be a problem if your friend or family member is prepared to wait for their money. However, if they are relying on you to make the payments so they can repay a loan they have taken on your behalf, it could well be an issue.

Continuing to pay back friends and family

Once you are bankrupt, you will have to agree a reasonable living expenditure budget with the official receiver (OR). Any money you have over and above this will be paid to the OR and be put towards repaying all of your creditors.

One thing to consider is whether you will be allowed to include a budget within your expenditure for paying friends or family debt.

The answer to this is no. You will not be able to include any expenditure specifically for the repayment of any unsecured debt in your monthly expenditure budget as this would be seen as a preferential payment.

One thing to bear in mind is that once your living expenditure budget is agreed, if you can make any savings out of your allowable expenses, you can do anything you wish with these.

As such, you could use them to make payments towards your friends and family debts. However, you may well be unable to afford to pay as much as you had originally agreed without putting your other living expenditures at risk.

Paying debt 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 if you have a savings plan such as an endowment or other policy which you could cash. This would be classed as an asset in bankruptcy which you would have to hand over to the OR anyway once bankrupt and so it would be lost.

However, if you pay off any creditor in this way and then declare bankruptcy, this will be seen as a preferential payment to that creditor over and above the others.

The Official Receiver would then be within their rights to approach whomever you had paid and request that this money was paid back. As such the friend or family member would remain unpaid and would definitely find out that you had declared yourself bankrupt.

Resume payment after bankruptcy ends

Once you are discharged from your bankruptcy which will normally be after twelve months, you are no longer bound by the restrictions of a bankrupt person.

This means that you can resume paying and amounts still owed to your friends or family at that time if you wish.

If the person you owe money to is willing to wait for repayment, it may therefore be sensible to agree this with them before declaring bankruptcy. You can then assure them that you should be in a position to repay them relatively quickly after you are discharged as you will no longer have your other unsecured debts to pay.

However, you will have to bear in mind that you may have been required to make payments to the official receiver each month in the form of an income payment arrangement or order.

These payments will normally have to continue for a further two years and so you may still have little or no spare cash to start paying friends and family until these payments have finished.

Agree to suspend payments

Often the best way of dealing with debt to friends and family if you want to declare yourself bankrupt is to agree with them that you will suspend the payments they receive until after your discharge.

However, if they are unable to afford this or you simply do not want to tell them that you are bankrupt, you are likely to struggle and bankruptcy may not be the best solution for you.

The only way to maintain payments to them while you are bankrupt will be to keep paying them what you can afford from your agreed expenditure budget.

However, this will only work if the expected payments are manageable and it is not to be recommended if you can possibly avoid this.