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Is It A Gift Or A Loan? Differentiating Between The Two When Filing For Bankruptcy

14 July 2015

Alexis Garcia

With the U.S. economy being relatively unstable, many American households are having difficulties making ends meet. The average U.S. household credit card debt amounted to $15,705 as of June, 2015. It is not uncommon for many people to ask their family members or friends for help, and many are able to get monetary gifts or loans as a result. Differentiating between whether you received a gift or a loan is important – especially if you may file for bankruptcy in the future. This is because gifts and loans are dealt with quite differently.

Differentiating Between a Gift or Loan

To avoid any financial disagreements in the future, be clear with family members and friends regarding whether the lump sum payment given to you is a gift or a loan. A gift is something they do not expect repayment for whereas a loan is something that they do. If you are receiving a loan, you must sign a promissory note for the money received to be treated as a loan in the eyes of the law.

The promissory note should include information like:

• The identity of both the borrower and the lender. For example, include full name, address and other forms of identification.
• The specific amount loaned. If your friend or relative is from a different country, make sure you denote the correct currency received.
• The repayment terms. This includes the amount to be repaid at different intervals, when the repayments are to be paid and the method of repayment.
• The consequences of not repaying.

If you fail to sign a promissory note, the bankruptcy attorney and trustee will consider the money received as a gift rather than a loan, and there will be no way for your family members or friends to retrieve it legally. In fact, the amount given to you is considered to be a part of your estate, and will be distributed evenly among creditors.

Denoting a Personal Loan When Filing for Bankruptcy

If a family member or friend has loaned you money and you have both signed a promissory note, you must list the lender as a creditor when you file for bankruptcy – regardless of whether it is under chapter 7, 11 or 13. The bankruptcy trustee or attorney will treat this loan the same way as any other loan you may have received.

When you file for bankruptcy, your attorney or trustee will liquefy all of your assets and distribute them back to the creditors. With a promissory note, anyone who has lent you some money will be entitled to receiving compensation for the loan they gave you. If you filed for chapter 7 bankruptcy, all of your assets will be liquefied and distributed evenly among creditors. On the other hand, if you applied for chapter 13, you will need to make repayments over the term of 3 to 5 years.

Once you are discharged from bankruptcy, the amount owed on any remaining loans will be wiped out. This means, you don't technically owe whoever loaned you money anything legally although you can still choose to repay him or her after the bankruptcy process in an attempt to maintain a good relationship.

Conclusion

If you're having a rough time paying bills and have asked a family member or a friend to help you out, you want to make sure you're clear on whether the money given to you is a loan or a gift. Do not forget to sign a promissory note to signify that the money given is a loan; otherwise, legally, the money is considered as a gift and cannot be retrieved by the lender if you file for bankruptcy in the future. This can complicate matters and put a strain on your relationships. For more information, check with professionals like Wade Bettis, J.D., Ph.D., PC.

                              

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