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 “loan†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.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
15y
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.
Lender · Fort Pierce, FL · Member since 2009 · 825 posts · 486 votes
15y
Originally posted by Carolyn Yane:
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 “loan†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.
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.
Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes
15y
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.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
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.
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
15y
Originally posted by Bryan Hancock:
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.
Except for the part where "no loan can be made bankruptcy proof". Under federal law, student loans can not be bankrupted away.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y
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?
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by Carolyn Yane:
This “loan†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.
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.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
15y
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.