Can a loan be bankruptcy proof?

Question

I need to know if I make a substantial personal loan to someone, is there any way to make the loan bankruptcy free?  Meaning, is there any way to legally word, etc the loan so that even if the borrower went bankrupt, they would still have to repay or I could go after their assets before other lenders, etc?  I understand that I need to protect myself in the contract in the event of death, incapacitation, etc.  However, how does one protect against bankruptcy?  Can one do this?  This â€œloanâ€ is one that would never have to be repaid as long as certain conditions were met.  However, if the contract was broken, the repayment would automatically kick in.

Kevin Yeats · Answer

Carolyn, this is really a legal question and since lawyers don't post on website message boards, you won't find a valid answer here (only opinions).

Go talk to a lawyer experienced in this subject.

Reading between the lines, if I were in your shoes and wanted to make this loan, I would require collateral and take possession of the same to assure repayment.  In other words become a pawn shop.

The information that you provide leads me to believe that the borrower is not creditworthy and you are trying to "help out."  Loans made in these sorts of circumstances often become "gifts."

Perhaps a better way to help is to find a way to help the borrower earn more income.

Good Luck in any case

Adam Tracy · Answer

There is, unfortunately, no way to make a debt bankruptcy proof. However, exceptions exist in bankruptcy, such as where you proved fraud

Jon Holdman · Answer

Are you seriously considering loaning money to someone who you think might declare bankruptcy and not pay you back?  If you are, then just GIVE them the money.  Why in the world would you make a loan if you though there was ANY risk of the borrower defaulting?

Bryan Hancock · Answer

I just wanted to point out that Adam (above) is an attorney for those reading this thread.  I am sure he isn't providing legal advice, but his input is most certainly correct.

Paul B. · Answer

There's nothing you can do to give yourself priority over other lenders apart from taking collateral. You most certainly can't have a side agreement in place that says, "Even if you go bankrupt, you still promise to pay me before all others." That's a sure-fire way for you to end up in jail.

I think you need to think through what risk you're really afraid of here, then address it. People generally can't go bankrupt willy-nilly; they have to be legitimately broke. If somene's broke, they can't pay their bills and loans. Point being, if your borrower doesn't have any money, whether he/she goes bankrupt is just about moot. People can't pay what they don't have.

Again, if you're trying to find a way to the front of the line, that's probably not going to happen.

Dave Toelkes · Answer

Carolyn,

Yes, some loans can survive bankruptcy.  For example, student loans can not be "bankrupted" away.  Unsecured personal loans can.

Bill Gulley · Answer

Secured creditors are generally protected*, unsecured debt can be washed out. It depends too on which chapter of bankruptcy is filed.

If a refinance was done and is a secured creditor and the bankruptcy orders the property sold and the sale price is not sufficient, the balance may be at risk. Usually, a property will pot be sold if it is the primary residence. So, if you secure a rental property or a second home, it could have a problem. The court will not usually force any sale unless it provides cash to pay other creditors.
A first mortgage is usually secure on a primary residence...

Other conditions may apply, best to seek advice on the circumstances rtaher than a blanket opinion.

If you have reason to believe that this might be the case, it's not a good loan.

Bill Gulley · Answer

Welcome to BP Paul! Hope to see more posts from you. And yes Brian, I suspected  Paul was an attorney from his post, but it's good to point that out!  And while bankruptcy is a federal case (lol) state law will have a bearing on what may be discharged.

And Paul makes a good point on side agreements, attempting to circumvent the purpose of the bankruptcy laws. This does not preclude having an agreement whereby the filing of bankruptcy will or can accelerate enforcement of other agreements, like the termination of the agreement or the right to accelrate amounts due to maturity.

While you should not dispose of any asset in contemplation of bankruptcy, many times something can be worked out within the family. The best thing might be to simply make the loan after the bankruptcy has been discharged.

Vikram C. · Answer

Looks like you are trying to give a gift to a family member with strings attached.  You can definitely do this - talk to a trust lawyer and you should be able to accomplish your goals.  If, on the other hand, your loan is going to be used by the borrower for the purchase of property, then get a security interest in it.  As Bill said, that should give you priority in bankruptcy and, if there is no equity in the asset, you will likely be able to get the bankruptcy court to allow you to sell the property and collect the proceeds.

Bryan Hancock · Answer

Since it was brought up earlier I figured it was worth mentioning what is always or sometimes exempt from bankruptcy:

-State and federal income taxes within the last three years

-Student loans (mentioned above)

-Vehicle accident claims due to drunk or reckless driving

-Â§523 Bankruptcy Code, money obtained by fraud:

Â§523 Bankruptcy Code

-Eve of bankruptcy luxury purchases

-Willful and malicious injury to another or his property

-Government fine

None of that will really help you at all, but I figured it would be good to know anyway ;-)

When you make loans you assume default risk.  Make sure you are compensated for this risk appropriately or don't do the loan.

Can a loan be bankruptcy proof?

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