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August 13, 2014

Gifts vs. Loans – Big Differences in Bankruptcy Court

I recently ran across an interesting blog post from Mark Markus, a bankruptcy lawyer in Los Angeles, who noted that the characterization of a your receipt of money as a gift is significantly different from characterizing that receipt of money as a loan.

If the funds received are a gift, the funds would count as income for means test purposes and these funds (assuming they are not yet spent) would be an asset of your bankruptcy estate and potentially reachable by a bankruptcy trustee.

By contrast, if funds received are treated as a loan, these funds would not count as income for means test purposes, although cash still on hand would be an asset.

Mr. Markus also notes that if you pay back the lender before filing, the repayment could have bankruptcy implications.  He is referring to the issue of preferences, which are provisions of the Bankruptcy Code that allow trustees to recover money from lenders in certain situations.

Your lawyer can advise you regarding the preference issues and about the means test as well as exemptions that can allow you to protect cash and other property from the trustee’s reach.  However, as Mr. Markus points out a threshold question is whether funds received are a gift or a loan.  What are the differences? [Read more...]