Personal Loans Between Friends And Family What Happens

2016-02-19   minute read

Lending money to family or friends can be complicated. While it’s natural to want to do what you can to offer support when it’s needed, there’s always that question of what happens if the debt is not repaid. For instance, what happens when a person files either a bankruptcy or a consumer proposal and they owe money to family members or friends?

Generally, this depends on whether the loan is a "true" loan (e.g. supported by a loan agreement, interest is charged, regular payments are made etc.) or not. If it is a true loan then the debt will be included in the bankruptcy / consumer proposal and treated just like any other debt and will receive a share of the distribution to creditors.

As is more often the case, the loan is not documented, there is no interest, no requirement for payment and there is little evidence to suggest that it is actually a loan rather than a gift, all of which may be problematic. In such a case, the Trustee in the bankruptcy / consumer proposal may not allow a claim for the debt. If the claim is from a family member and the debt is accepted it may still rank after all other debts as debts due to related parties cannot be paid until all other debts are paid in full - which rarely happens.

I should also note that related parties cannot vote in favour of a proposal, only against one. This is done deliberately to prevent family members being able to vote in a proposal that is inherently unfair to other unrelated creditors.

Furthermore, debtors often feel a higher obligation to repay family members and friends for money owing to them. While this is understandable, the Bankruptcy and Insolvency Act is designed to treat all creditors as equally as possible. Accordingly all debts, including those owing to family and friends are released at the conclusion of a bankruptcy or proposal. There is a good chance many debtors actually do repay their family / friends after the conclusion of the process (at which point the payment is legally a gift, not a loan repayment) but making payments to family / friends during a bankruptcy or consumer proposal is problematic to say the least.

It is always possible in a proposal to create two classes of creditors (family and other, for example) and treat them differently. If you owe significant funds to family or friends or are having difficulty managing your debt load, please contact one of our licensed Trustees for a free, no-obligation consultation. This will give you the opportunity to review the debt solutions available and choose a route the best meets your needs.

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