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Pop Quiz on Discharging Unsecured Debt in New York

This quiz has a single multiple choice question. Suppose you have more credit card debt than you can pay down?  This is not an uncommon situation—but let’s add a twist: one of your creditors is a family member. The debt situation cannot be resolved without bankruptcy, but you don’t want to create discord among your relatives. Which of the following three options do you take?

(A) File bankruptcy, include the relative’s loan, and discharge it?
(B) File bankruptcy yet omit the relative’s loan from your petition?
(C) File bankruptcy, include the relative’s loan, but claim it was a gift and not a loan?

The correct answer? (A).

(B) is absolutely wrong because bankruptcy requires you to list all your assets, income, and debts on your petition. You cannot omit any of these, for doing so is committing perjury. A bankruptcy petition is a legal document, and debtors are required to affirm to the best of their knowledge that the statements on the petition are true and accurate. The bankruptcy court can deny anyone who omits a debt or an asset the discharge they seek. Consequently, excluding the relative’s loan is not an option.

(C) is incorrect but for a different and more nuanced reason. If you claim that the loan was a gift, the bankruptcy Trustee will declare it as an asset. The problem is that it may not be subject to an exemption either, and the Trustee will add it to the bankruptcy estate. Alternatively, if you’re filing Chapter 7, the “gift” may bring your income above the limit set by the means test. If this happens, you’ll be forced to refile in Chapter 13, which you may not wish to do.

(A) is right. At this point, you may be concerned that your relative will become angry at you for discharging his or her loan. Yes, the loan is unenforceable after bankruptcy. Creditors cannot use any normally legal methods to resume payment, such as hiring debt collectors, suing you for the balance, or even sending you a bill. On the other hand, after bankruptcy you are free to pay down your past debts. Thus, you can repay your relative as though nothing happened. True, you do have the upper hand, but if the issue is preserving family harmony and protecting your own finances, this is the way to achieve both.

For more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced fair debt collection practices act Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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