Bankruptcy rules and loans from family and friends
Take action so your bankruptcy does not impact someone you know.
If you pay money to someone before bankruptcy
The official receiver (OR) is the person who oversees your bankruptcy.
The OR may ask that person to return the money, if:
- They think it was unfair on your other creditors
- Paying one debt instead of others is called 'preferential treatment'
- You knew you were going bankrupt when you paid them
- You made the payment within the last two years
Court action can be taken if they do not pay the money back.
- The OR uses this money to cover some of their own costs
- They share the rest out fairly among the people you owe
- This is called ‘reversing a preference’
This can apply to any payment made in the six months before your bankruptcy. Even if you do not know the creditor.
The OR may also decide to make your bankruptcy longer.
They do this through a 'bankruptcy restriction undertaking or order'.
If you plan to pay back money after bankruptcy
Loans to people you know get treated like any other loan in bankruptcy. You must stop paying them directly after bankruptcy.
The OR may raise money by:
- Selling your assets
- Asking you to make payments for three years after your bankruptcy
The OR pays the people you owe a fair share of this money.
They could take court action if you keep paying a loan to someone you know.
The people you owe cannot take legal action against you after bankruptcy. This includes people you know.
This could cause problems if you cannot pay back a loan.
For a small loan, try asking the person if you can pay them in kind, like by doing odd jobs.
If you give money or assets away before bankruptcy
The OR can ask the person you gave things to to give them back.
- The asset is then sold
- The OR uses this money to cover some of their own costs
- They share the rest out fairly among the people you owe
Examples of assets include:
- Property
- Vehicles
- Other items of value. Such as jewellery
- Money, shares or other investments
If you sell 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.
Let's say:
- Your car is worth £5000
- You sell it to friend for £3000
- The OR could ask them to pay the £2000 difference
- They could also make your bankruptcy last longer
This is called a ‘transaction at an undervalue’.
The OR can take the person to court if they refuse to:
- Give the asset back
- Pay the amount asked for
This can happen with any assets you sell or give away to:
- Someone you know within the last five years, or
- A creditor or third party you do not know within two years
These time limits do not apply if the OR can show you tried to hide money.