Does My Family Need to Know I’m Filing for Bankruptcy?

Our clients often want to know if they can keep their bankruptcy filing a secret.  We tell them that the only people who will know about their bankruptcy filing are their creditors, and certain court officers in the Las Vegas bankruptcy court.  If you prefer to keep your bankruptcy filing confidential, chances are you’ll be able to.

Still, it might be a good idea to discuss your bankruptcy filing with your family.  One reason is to prevent your relatives from transferring assets to you which could be included as part of your bankruptcy estate, and sold to collect money for your creditors.

For example, your parents might transfer their home to you if they anticipate applying for Medicaid in order to pay their nursing home costs.  Since your parents will likely continue to live in their home until they make the move to a nursing home, they may not have even told you about the transfer.  If you file for bankruptcy, however, the bankruptcy trustee apppinted in your case might be able to sell the home in order to pay your creditors.

Another reason to let your family know you’ve filed for bankruptcy is to manage their expectations about paying them back any loans you may owe them.  It’s natural for you to want to repay your family members before you file for bankruptcy, but it’s a bad idea.

The reason we advise against repaying your family members before filing for bankruptcy is because bankruptcy laws aim to give equal treatment to all creditors with the same type of debt.  For example, you’ll be expected to repay your credit card company the same percentage on the unsecured debt you owe it, as you’ll repay your brother on the unsecured loan he gave you.  In fact, if you give favorable treatment to one of your creditors even before filing for bankruptcy, the bankruptcy trustee can sue that favored creditor to get the money back, so that it can be evenly distributed among all your creditors. This is called “avoiding a preference.”

For most creditors, the bankruptcy trustee will examine whether you gave them any preferential treatment within the 90 days leading up to your bankruptcy filing.  With family members, however, the trustee will look at your transfers to them in the year before you filed for bankruptcy.  Therefore, a better idea than paying back your family members before your bankruptcy filing is to wait until after your bankruptcy to repay these debts.  Of course, you won’t be legally obligated to pay back any debts after your bankruptcy case is over, but the Bankruptcy Code allows you to make voluntary repayments.