Bankruptcy & Lending To Friends: Watch the Paperwork

by Wendell Sherk, Missouri Bankruptcy Attorney

It’s not unusual for folks to get loans from friends and family when they’re in financial trouble or facing bankruptcy.  But it’s good to do the paperwork right sometimes.

If mom is going to lend you money to buy a car, she should act like the Bank of Mother and take the time to do the paperwork to make it a proper car loan, for example.  Depending on your state laws, this will often mean that you have a real promissory note that includes a security agreement — a pledge — of the car as collateral for the loan.  And mom’s lien should be recorded on the car’s certificate of title, just like a bank would.  At the same time the loan is made.

These sorts of details can protect mom’s right to collect the debt — and potentially make it easier for you to keep the car if you have to file bankruptcy some day.

What happens when you don’t jump through the paperwork hoops?  Sometimes everyone loses.  (At least everyone you care about!)

Take for example the recent case where a friend had taken out a mortgage on property from a friend.  The paperwork had been done correctly originally.  But later on, the friend lent more money.  Initially to help out with the borrower’s payroll but then the borrower used the money to pay the real estate taxes on the property.

When the borrower filed bankruptcy, the trustee believed there was enough equity in the property to sell it to make money for the other creditors.  The lender-friend claimed there was no equity — and therefore the trustee shouldn’t sell — because he had paid the real estate taxes (with the new loan) and added that to the balance of the mortgage was eating up the equity.

The 8th Circuit Bankruptcy Appellate Panel allowed the trustee to sell.  It pointed out that the lender-friend had not complied with the actual loan contract — he had not paid the taxes himself and added it to the loan — but rather had made a new loan to his friend, who could have used it for other things including the original purpose (helping meet his payroll).

So the friendly lender would not have his new loan secured by the property, would not get that money back and the debtor lost the property.  All because two friends acted like friends do, helping one another out in a tight spot.

The moral to the story is that friendship is friendship.  And lending is… business — treat it like a business.  That way, no one else can step in and ruin your friendship later.

The case mentioned here is VanCura v. Hanrahan (In re Meill), #10-6019 (8th Cir. BAP 12/30/10) (slip opinion).


Wendell J. Sherk is an attorney in St. Louis, practicing primarily in consumer bankruptcy and debtor representation.  He graduated from Washington University in 1986 and Washington University School of Law in 1989.  He is a principal of the firm Sherk & Swope, LLC as well as a member of the National Association of Consumer Bankruptcy Attorneys, American Bankruptcy Institute, and The Missouri Bar.  He contributes to the bankruptcylawnetwork.com blog and his e-mail is: [email protected].


No Author Biography has been linked to this Article.

Related Articles

February 24, 2019
By Cathy Moran, Esq. (Redwood City, CA) We all get sucked in, at some time, to try and rescue a Chapter 13 bankruptcy case gone bad. Make sure that you don’t let a bad situation get worse. Get your arms around §109(g). When only a do-over will do, don’t wait around. No Payments for Months The debtor came to me...
Members
moran_cathy
February 11, 2024
Communications Practice Pointer! Convincing clients that all of their debts must be included in bankruptcy is one of the hardest parts of being a bankruptcy lawyer. Communicating clearly with our clients, in their language, is a key part of our job. The struggle often seems Herculean.
Members
NBR cropped 2
May 15, 2022
Dear Readers: There are some basic truths. One is that when someone says, “hey, watch this!,” the result is likely to involve blood or stitches. Another is that, when an author describes something with the leadoff word, “interestingly,” it often isn’t. And a third is that one shouldn’t mislead bankruptcy judges. In two wonderfully written cases, bankruptcy judges made this...
Members
DSC09148
August 18, 2024
Bankruptcy Courts are beginning to get a whiff of the fringes of the marijuana industry. Namely, is it automatically bad faith for “Bud” to propose a plan when his income is derived from a perfectly legal (as far as the state is concerned) business? Attorney Gieseke brings Academy readers an up to date look at what courts are saying.
Members
August 23, 2020
By Cathy Moran, Esq. (Redwood City, CA) It started as a means test question: could emergency medical expenses be deemed non consumer debt. It ended up as a step back to get the bigger picture. Well-seasoned bankruptcy counsel brought the fact pattern to a list serve of colleagues. The prospective debtors’ income in a small consulting corporation is declining, his...
Members
June 7, 2020
By Lawrence R. Ahern III, Brown & Ahern (Nashville, TN) Introduction Chapter 13 practitioners certainly do not need to be told that a lender with a mortgage1 on the debtor's principal residence has a special position in a Chapter 13 case. A chapter 13 plan may "modify the rights of holders of secured claims, other than a claim secured only...
Members
Copy of Hildebrand-2016
August 27, 2023
A creditor having received relief from the automatic stay prior to confirmation of the debtor’s plan is nonetheless bound by the terms of the plan, once confirmed.
Members
October 3, 2021
Jack N. Zaharopoulos was appointed as the Chapter 13 Standing Trustee for the Middle District of Pennsylvania on May 1, 2021. He succeeded Charles DeHart after his retirement. After graduating from Marquette Law School in Milwaukee in 2002, Zaharopoulos worked at a general practice firm, doing debtor and creditor bankruptcy work, family law, and even some criminal cases. After gaining...
August 1, 2021
By Cathy Moran, Esq., (Redwood City, CA) Eighteen years elapsed between the close of the 2003 tax year and the Tax Court’s 2021 decision Barnes v. Comm'r, T.C. Memo. 2021-49 (U.S.T.C. May 4, 2021) regarding the debtors’ 2003 tax liability. While the most recent decision in the debtors’ battle with the IRS challenged the discretion of a tax officer in...
Members

Looking to Become a Member?

ConsiderChapter13.org offers a forum to advance continuing education of consumer bankruptcy via access to insightful articles, informative webinars, and the latest industry news. Join now to benefit from expert resources and stay informed.

Webinars

These informative sessions are led by industry experts and cover a range of consumer bankruptcy topics.

Member Articles

Written by industry experts, these articles provide in-depth analysis and practical guidance on consumer bankruptcy topics.

Industry News

The Academy is the go-to source for the latest news and analysis in the Chapter 13 bankruptcy industry.

To get started, please let us know which of these best fits your current position: