Friend Owes You Money Then Files Bankruptcy: What Happens to Your Loan and What You Can Do

You lent money to a friend in good faith—maybe to help with rent, medical bills, starting a business, or just getting through a tough time. Then, before they pay you back, you hear the news: they’ve filed for bankruptcy. Suddenly, you’re left wondering if you’ll ever see that money again.

It’s a tough situation, and it’s even more complicated because of the emotional layer. You may feel betrayed, frustrated, or even guilty for bringing it up. But it’s important to understand your legal rights, how bankruptcy affects your ability to collect a personal loan, and what (if anything) you can do to recover the debt.

This guide walks you through the key steps, legal processes, and realistic outcomes when someone who owes you money files for bankruptcy.

Step 1: Understand What Bankruptcy Does

When someone files for bankruptcy, they’re asking a court to relieve them of some or all of their debts. It’s a legal process that offers debtors protection from creditors and gives them a fresh financial start.

There are different types of bankruptcy, but most individuals file either:

• Chapter 7 (liquidation) – Assets are sold (if any), and most unsecured debts are wiped out.
• Chapter 13 (reorganization) – The debtor repays part of their debts over 3–5 years under a court-approved plan.

As a creditor (even if you're a private individual, not a business), your ability to collect the money they owe you is immediately affected by the automatic stay—a court order that stops all collection efforts, including texts, calls, or legal actions.

Step 2: Determine If You’re a Listed Creditor

When someone files for bankruptcy, they must list all their debts and creditors in their bankruptcy petition. This includes personal loans—even informal ones.

If your friend listed you as a creditor:

• You should receive a notice from the bankruptcy court informing you of the filing and outlining key dates and deadlines.
• The notice will explain whether it’s a Chapter 7 or Chapter 13 case and what actions you can take (like objecting to discharge).

If you didn’t receive a notice, it’s possible you weren’t listed. In that case, you may still be able to file a claim—but you’ll need to act quickly.

Step 3: Gather Your Documentation

To protect your interests, start gathering all documents related to the loan, including:

• A written loan agreement, if you have one
• Text messages, emails, or other communications that confirm the debt
• Records of bank transfers, Venmo/PayPal receipts, or checks used to lend the money
• Notes about any promises to repay or partial payments already made
• Any proof of your friend acknowledging the loan after the fact

Even if it wasn’t a formal contract, informal evidence can help establish that the money was a loan—not a gift, which can be harder to recover.

Step 4: File a Proof of Claim (if Allowed)

In Chapter 13 and some Chapter 7 cases, the bankruptcy trustee may allow creditors to file a proof of claim—a legal form stating that you’re owed money.

• This form must be submitted by a specific deadline (called the "bar date").
• You’ll need to attach evidence of the debt.
• Filing doesn’t guarantee repayment, but it puts you in line with other creditors.

In Chapter 7 cases with no available assets (called “no-asset cases”), there may be no repayment at all—but you’ll still want to file a claim if the trustee later discovers assets.

Step 5: Can the Debt Be Discharged?

Most unsecured personal loans can be discharged in bankruptcy, meaning the debtor is no longer legally required to pay them.

However, in certain situations, you can challenge the discharge of your debt by filing an adversary proceeding (a type of lawsuit within the bankruptcy case). To succeed, you’d need to show:

• Fraud – The debtor borrowed the money with no intention of paying it back.
• False pretenses or misrepresentation – They lied to convince you to lend them the money.
• Willful and malicious injury – They harmed you financially on purpose.

These challenges are difficult to win and must be filed within a short period (typically 60 days from the first meeting of creditors).

You’ll need legal counsel to pursue this route, as it involves presenting strong evidence and following strict court procedures.

Step 6: Don’t Try to Collect Outside the Legal Process

Once your friend files for bankruptcy, the automatic stay prohibits you from:

• Calling or texting to demand payment
• Threatening legal action or wage garnishment
• Asking their friends or employer for repayment
• Posting publicly about the debt (which could lead to harassment claims)

Violating the automatic stay can result in legal penalties against you, even if the debt is legitimate.

Let the court process unfold. If your claim is valid and there's a chance of repayment, it will be handled according to bankruptcy law.

Step 7: Consider the Emotional and Financial Cost

Sometimes, even when you're legally right, the cost of pursuing repayment—financially and emotionally—may outweigh the benefit. If your friend filed Chapter 7 and has no assets, the likelihood of repayment is very low.

You’ll need to decide whether it’s worth:

• Filing a proof of claim
• Hiring an attorney to challenge discharge
• Accepting the loss and moving on

This is a deeply personal decision. It can help to consult a financial or legal advisor for objective input based on your situation.

Step 8: Protect Yourself in the Future

This experience may have taught you some hard lessons about personal lending. If you ever consider loaning money again—whether to a friend, family member, or colleague—take steps to protect yourself:

• Draft a clear loan agreement that includes repayment terms, interest (if any), and signatures
• Keep detailed records of all communications and transactions
• Consider using a payment platform with tracking
• Set boundaries—it's okay to say no if you're uncomfortable

You can be generous and helpful without being legally vulnerable.

Final Thoughts

When a friend who owes you money files for bankruptcy, it’s more than a legal issue—it’s an emotional one. You may feel helpless, betrayed, or unsure what to do next. But there are legal steps you can take to understand your rights, protect your interests, and respond wisely.

Not all debts survive bankruptcy—but your dignity, boundaries, and future financial safety can. Stay calm, document everything, and don’t hesitate to seek legal advice if you're considering filing a claim or contesting the discharge.

Don’t Be Afraid To Get Help

If you’re facing legal questions, safety concerns, or emotional turmoil due to any of the situations described above—especially domestic abuse—don’t try to handle it alone. Professional guidance can make all the difference in ensuring your rights are protected and your next steps are clear. Whether you need legal advice, help with documentation, or assistance navigating local resources, speaking to an expert can bring peace of mind. Click here to get connected with professional support tailored to your situation.