The Bankruptcy Alphabet: “G” is for “gift” or loan?

June 1, 2012

Quite often a client will want to characterize money they received from a relative as a loan, when in reality it is probably a gift.  In bankruptcy, transactions between related individuals are probably more carefully scrutinized than any other type of transaction.   How the parties label a transaction is irrelevant.  The court will look to the character of the transaction when determing how to label it.

The factors a court will consider may include any of the following:

  • Is the agreement in writing?
  • Does the agreement include interest on the debt?
  • Is there a fixed repayment schedule?
  • Is the loan secured by collateral?
  • What is the payment history?
  • What was the prospect of repayment?
  • Did the conduct of the parties suggest that this was a loan?
(In Re Killian, 422 B.R. 903, (Bankr. N.D. Ill. 2009)).  These are certainly not the only factors a court may consider.  The moral of this story is that if you are going to enter into a financial transaction with Uncle Joe, if you don’t adhere to the formalities of a loan transaction, a judge may decide that the loan was really a gift.