There is a legal doctrine known as “fraudulent conveyance” that also comes into play when friends and family do business. Basically this is a legal doctrine which protects the rights of creditors from the effects of certain “friendly transactions”.

People who know that they may be sued to collect a debt, or that they may be forced into bankruptcy, have a powerful incentive to protect property they owned by transferring it to their friends and family to keep it safe from creditors.

If the person who owns the money, transfers the property to hinder or delay the creditor or if the transfer is for less than fair market value, then the court may invalidate the transfer.

If you’re contemplating bankruptcy, then different factors come into play. If you are sued or go bankrupt, the court might closely scrutinize your financial life. This scrutiny includes looking at any loans or transfers of property that you have made to friends and relatives.

If you try to get rid of assets after you are sued so that you have nothing left to pay a judgment with, a court may conclude you have made a fraudulent conveyance. Courts will put aside these transfers and let the creditors attach your assets regardless of any kind of transfer arrangement you’ve made prior.