What to do if a trustee is demanding immediate payment in full?

A friend loaned me $5000. A year later he filed for bankruptcy. I just received a letter from a trustee asking for payment in full. The understanding with my friend was I could pay the money back whenever I could, no matter how long it took. What should I do?

Asked on September 27, 2011 under Bankruptcy Law, Tennessee

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

There are fourt different issues here:

1)  First, as a legal matter, a loan agreement is generally enforceable as per its terms; so if you can show what the repayment terms were, in theory, that would be when you need to repay--and no earlier.

2) Second, though, if the agreement was oral, as a practical matter, it may be very difficult to prove those terms, especially if your friend has told the trustee something different (e.g. that you'd repay it when he asked you). Note, as discussed under # 4, below, that the courts (and IRS) have difficult believing in open-ended loans, with no time for repayment; they tend to treat them as gifts.

3) While oral agreements are generally enforceable, it is sometimes the case that they must be in writing if for more than a certain dollar amount or will take more than 1 year to perform; therefore, there may be an issue with an oral agreement, if that's all you have.

4) Generally speaking, a loan has either a definite repayment time (or schedule) or some definite event which triggers repayment (e.g. on sale of property). An open ended loan which you might never have to repay might not be considered a "loan" but rather income or a gift, which tax consequences to you.

This is a more complex situation than might appear at first glance; you should consult with an attorney, assuming you can't or don't want to simply repay the money.


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