Dear Rick:
I made a terrible mistake and I hope you can give me some advice. About three years ago I sold my house. I am a widow, and all the kids were out of the house, so I decided to downsize. My original plan was to sell my house and use the proceeds to pay cash for a condo. I did sell the house and bought a condo, but as opposed to paying cash, I financed the purchase. The condo was brand new and it had some incentives if you financed with them. I took the proceeds and gave it to my daughter and her husband, as they needed the money to start a business. I now need the money back, but my daughter says it was a gift and that they cannot afford to repay the money. I know the business has been struggling, and a few weeks ago they closed the business. I received a notice from the bankruptcy court that both my daughter and her husband had filed for chapter 7 bankruptcy-I was listed as a creditor. They listed over $500,000 in debt and assets of about $10,000. My first question is, why would I get a notice from the bankruptcy court and what should I do? My second question, is the money I gave my daughter gone, or do you think I have a chance of getting it back?

Thank you.
Judy

Dear Judy:
Let me take the second question first. Obviously, I don’t know about the bankruptcy; however, in the great majority of chapter 7 bankruptcies people in your situation get either very little back, pennies on the dollar, or nothing. Therefore, based on their assets and liabilities, I would assume you’re not going to receive any money.

The reason why you received the notice from the bankruptcy court is the fact that you potentially are a creditor. The issue is when you gave your daughter and son-in-law the money, what was it. Was it a personal loan that you expect to be repaid, or was it an outright gift to your daughter and son-in-law? The fact that you received notice means that your daughter and her husband were covering their bases, in case it was later determined that the money you gave them was a loan as opposed to a gift. If it was in fact a loan, the bankruptcy would discharge them from their obligation to repay the loan. If it was a gift, they have no obligation to repay.

As a creditor in a bankruptcy, you have rights. For example, if there was a fraud involved, it’s potentially possible that the court rules that that debt is not dischargeable under bankruptcy. If you think that there was some fraud involved or other types of shenanigans, it may be in your best interest to consult a bankruptcy attorney. That being said, you would have an uphill battle.

I cannot stress enough that when you “give” money to a loved one you must document exactly what it is. If it is a loan that you expect to be repaid, you need to have something in writing that spells out the terms of the loan including an interest and repayment schedule. It is important that the borrower sign the document acknowledging their obligation. In the case at hand, since nothing was put in writing, it would seem to me that it was not a loan where you would expect repayment but rather, a gift.

Helping children financially is a wonderful thing; however, it is important that you look at your own finances first. You need to assure yourself that you have resources to protect yourself no matter what happens. When it comes to loans to family members, I always tell people they should make the assumption they won’t get repaid. I do that because I want to make sure the person is certain they have the resources to loan the money whether they are repaid or not.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.