Watch Out for Good Deeds When Helping a Friend in Bankruptcy

Posted by Col Ovik on September 4, 2021 at 10:15 AM
Col Ovik

Are You Over Withholding on Your Paychecks in MNEveryone knows the old adage, no good deed goes unpunished, and this is also true in bankruptcy. So, while it may be noble to help out a friend or family member, it can also complicate your bankruptcy. Expensive gifts, gifted while you are insolvent can be a point of contention in your bankruptcy, but what about other good deeds: lending money, co-signing on loans, or taking out loans for someone else?

Lending Money

Lending money to friends or family members prior to filing bankruptcy, does not necessarily have to be problematic in your bankruptcy, but the monies owed to you by those individuals will have to be listed in your bankruptcy as an asset. If for example, you lent your brother $5,000 and you are a federal exemption case (with little to no other assets) there likely will be no issues.

If you have a house (or other large assets), with plenty of equity, your case will likely be a state exemption case, and the $5,000 loan (monies owed to you) will likely be an issue. In state exemption cases, we cannot protect the $5,000 that is owed to you and in a chapter 7 case the trustee will likely sue your brother for the funds owed and distribute those funds to your creditors.


Co-signing for loans can also be problematic. If the lender did not correctly perfect the lien, the lien can be avoided by the trustee and the security interest in the property (likely a vehicle) will be extinguished. But the personal liability for the co-debtor will remain. The vehicle will be liquidated and sold, but the co-debtor will still owe for the debt.

Taking Out a Loan for Someone Else

The issue of taking out a loan for someone else can also be an issue. First, you will be the only one legally liable on the debt, but another person will receive the benefit of the loan, i.e. the funds. Now you have just gifted that person the loan value. Large gifts to close friends and family members in a bankruptcy will be highly scrutinized in a chapter 7 bankruptcy filing.  


There are plenty of landmines when filing bankruptcy and trying to help a friend or family member can occasionally cause an issue in your bankruptcy case, but you and your lawyer can develop a strategy to deal with those issues. Contact the attorneys at LifeBackLaw and see us at You will be glad you did!

Topics: bankruptcy in minnesota

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