Bankruptcy expert Leon Bayer answers real-life questions.
I am getting ready to file bankruptcy and am getting conflicting advice about whether I have to list a debt I owe to my mother.
Over the past six years I have borrowed a total of $50,000 from my mother. We never signed anything, but she expects to be paid back if I am ever able to do so. Beyond that, she has not attached any other conditions.
My hair stylist, who filed bankruptcy, says I only have to list the debts I can’t pay. I have consulted with two lawyers. One says I must list every debt, including the money I owe my mother. The other says I should list my mother’s debt, but if I don’t, no one will ever know.
I’m sure you get this question all the time, but it’s a big issue for me. If I list my mother as a creditor, it might appear like I don’t trust her, and it will hurt her feelings. What should I do?
It’s an excellent question and you are right – I get it all the time. I have probably answered it 30,000 times already will likely answer it another 20,000 times before I go up to the big bankruptcy court in the sky.
The short answer is that you are required to list all of your debts when you file for bankruptcy.
You Must List All Debts in Bankruptcy
You said you “borrowed” money from your mother. That means it’s a debt. When you file for bankruptcy, you must list all of your debts on your bankruptcy papers (called the petition and schedules). Contrary to your hair stylist’s understanding of the law, your bankruptcy schedule of creditors is not a wish list of the debts you want to eliminate. Rather, your bankruptcy papers are a financial statement, and the law requires that they be accurate. If the court finds that your schedules are not reliable or were prepared with no regard to accuracy, your case could be denied.
Case in point: I recently represented a creditor in a Chapter 13 bankruptcy case. I was successful in persuading the court to convert the case to Chapter 7, which is an extreme rarity, by proving that the debtor knowingly submitted materially false bankruptcy schedules. That debtor is now going to lose his house in a forced sale by the Chapter 7 trustee, and my client is going to get paid.
Strategies for Facing Your Mother
That said, I’ll give you some practical strategies that may allow you to do the right thing and prevent hurt feelings and embarrassment.
Let’s face it. Your mom already knows about your money troubles. Your consideration of bankruptcy should be no surprise to her. In fact, she may actually be glad to have you discharge your debts in bankruptcy instead of asking her to pay them.
You may feel better if you talk to mom, and “fess up.” You can explain that you are legally required to list all of your debts, and that the failure to do so can have serious consequences. You can also tell mom that the law allows you to repay debts after bankruptcy.
Your Bankruptcy Might Provide Your Mom With a Tax Benefit
Now, get this. Your mom might actually benefit if you file bankruptcy – it may make her eligible for tax relief by demonstrating that your debt is “uncollectable.”
Here’s how this works. If the debt is discharged in your bankruptcy, she will have what the IRS calls “absolute proof of loss.” In other words, it establishes that she can’t ever collect the debt. See, IRS Publication Topic 453 – Bad Debt Deduction. Normally, your mother would have to sue you and make reasonable efforts to force you to pay before deducting your debt as a “bad debt.” But having your debt discharged in bankruptcy allows her to skip those steps. She should speak to a tax advisor to determine if she is eligible for this tax deduction.
One last point: Please tell your stylist to stick to hair, and stop handing out legal advice.
Leon Bayer is a Los Angeles bankruptcy attorney. He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy. The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo. By answering a question on this blog, Mr. Bayer does not become your lawyer.