Maybe you couldn’t make your credit card payment, so you borrowed some money from your sister. Maybe you couldn’t afford the down payment on a house, so your parents loaned you the cash. Now your debts have piled up and you’re planning on filing for bankruptcy. Can you pay your family back?
This issue impacts more people than you might imagine. According to a 2025 report from JG Wentworth, Americans currently owe about $38 billion to family members.
In this post, we explain how filing bankruptcy may impact debts to family members, how to avoid having the bankruptcy trustee try to “unwind” payments you made to family members, and how to get help with your bankruptcy today.
Your Family Members are Considered Creditors in Bankruptcy
When you file for bankruptcy, you must list all of your debts and creditors. That includes money you owe family members. The court uses this list to give notice to all of your creditors that you’re filing for bankruptcy and that you’re now protected by the automatic stay — which halts foreclosures, lawsuits, repossessions, and other collection methods. You must include personal loans from friends and family members on this list. In a Chapter 7 bankruptcy case, there is little chance that they will receive any payment. In a Chapter 13 case, they may receive some payment, but it is often a fraction of what is owed.
If you list debts from family members, you may be asked for documentation–particularly if the debts are relatively large. Making up or inflating a debt to a family member to re-route a greater share of payments to them is considered bankruptcy fraud and could result in denial of your discharge and possibly more serious consequences.
How are Creditors Paid in Bankruptcy?
Chapter 7
In a Chapter 7 bankruptcy case, your nonexempt property is sold and the proceeds go to creditors. Whatever debt remains after this process is discharged, which means you don’t have to pay it. In most cases, debtors have no nonexempt property and creditors get nothing. The debts are officially wiped out with minimal or no repayment, whether the debt is to a credit card company or your mom.
Chapter 13
In Chapter 13 bankruptcy, you’ll make scheduled plan payments. In some Chapter 13 cases, unsecured creditors are paid back in full. More often, they receive partial payment or no payment at all. Family members don’t get special treatment, but they aren’t penalized either. Your family may get some money back over the course of the plan, depending on your income and the amount of your secured and unsecured debt. At the end of the plan, the remaining debts are discharged. In either case, unless your plan pays back 100% to all creditors, your family almost definitely won’t get full repayment — many debtors pay pennies on the dollar for their unsecured debts before discharge.
Can I repay my family after bankruptcy?
You may choose to voluntarily repay your friends and family anyway after bankruptcy. There are potential tax consequences, but they don’t affect most people who have filed bankruptcy. Because you’re no longer repaying a loan (since the loan was discharged in bankruptcy), the payment to your family is considered a gift. In 2026, you can gift up to $19,000 annually without having to report the gift to the IRS. Any amount that exceeds the limit (which is periodically adjusted) must be reported and will count against your lifetime gift and estate tax exclusion.
See also: How Long Will a Debt Stay on My Credit Report?
What if I pay my family back before I file for bankruptcy?
This option probably seems attractive to family members worried about repayment. They may be concerned that you won’t want to or be able to pay them after bankruptcy and they won’t have any claim if they were listed as a creditor and you received a discharge. Can you simply pay them before you file?
That depends on how far in advance of filing bankruptcy you pay them, and whether you are treating them the same as other creditors. Bankruptcy is designed to help consumers get out from under crippling loads of debt while still treating creditors as fairly as possible. That means all creditors must be treated equally through your bankruptcy process and in the lead-up to filing.
To that end, the bankruptcy trustee will investigate your financial activity during the “preferential transfer period.” For payments to non-family creditors, that period starts 90 days before you file for bankruptcy. The bankruptcy trustee can “claw back,” or reclaim for your bankruptcy estate, any payment above a certain threshold made to a creditor during the preferential transfer period. In 2026, that amount is $900. This rule aims to prevent you from paying off one creditor while discharging your debts to others through bankruptcy.
Friends, family members, and business associates are considered “insiders” for bankruptcy purposes. For payments to insiders, the preferential transfer period starts one year before you file for bankruptcy. In other words, if you paid back a loan to your parents 7 months ago and you file for bankruptcy tomorrow, the trustee can take that money back from them and include it in your bankruptcy estate.
Repaying a regular creditor or an insider during the preferential transfer period is not illegal. You won’t be in any legal trouble, but they won’t get to keep the money. And, your family member could become entangled in your bankruptcy case. Failing to disclose a payment of more than $600 made during the preferential transfer period, however, is illegal and could cause the court to deny your discharge or worse. Transferring property with the intent of hiding it from creditors is also illegal; the bankruptcy trustee and your creditors will look at your financial history to see if you’ve transferred assets as gifts in order to keep them out of your bankruptcy estate.
Exceptions to the Preferential Transfer Period
A transfer made before you file for bankruptcy is avoidable (meaning it can be clawed back by the trustee) if you were insolvent at the time you made the payment. You are insolvent if your debts exceed your assets. Most people who file bankruptcy have been struggling with debt for a long time. But, that’s not always true. For instance, if you repaid that loan to your parents 7 months ago when you were solvent, then lost your job a month later and ended up filing bankruptcy, the trustee can’t take the money back. The court presumes that you are insolvent during the 90 days before you file for bankruptcy; proving that you were solvent during that time is very difficult.
Even for payments made more than 90 days before you file for bankruptcy, you may have to prove that you were solvent.
For more information: Transferring Assets Before Bankruptcy in California
How can I pay my family back?
If you have paid your family member back an amount that would be considered a preferential payment, you can wait until the look-back period has expired. If you file for bankruptcy more than a year after you make the payment to your family, the trustee can’t claw the money back.
If you can’t wait that long (many debtors can’t), you may choose to file under Chapter 7 and pay your family later with money you earn after you file for bankruptcy. Under Chapter 7, money you earn after you file is not a part of your bankruptcy estate and you can do whatever you want with it. Under Chapter 13, the money you earn after filing does become part of your bankruptcy estate and you won’t be able to make payments to family members outside your payment plan.
The bottom line is that many people turn to their families first in times of hardship, financial and otherwise. We want to repay them first when we have the means. However, bankruptcy law treats your family just like every other creditor. If you’re taking a loan from or making a loan to a family member, make sure that loan is documented. You are required to list all creditors and outstanding debts, and you may be asked for proof.
If you’re struggling with debts to family members and other creditors, reach out to one of our experienced bankruptcy attorneys for a free consultation to discuss your circumstances and your options.