“I Loaned A Friend Some Money. Can He File Bankruptcy On It?”

The short answer is “probably.” Bankruptcy is a Federal right, and can be filed by anyone who qualifies. Loans are debts that are commonly included in bankruptcy petitions, and unsecured loans (loans with no collateral) are extremely unlikely to be paid back out of the bankruptcy estate.

There are two kinds of personal bankruptcy that can filed. Chapter 7 is known as a “liquidation” and in most cases debts that are included on a Chapter 7 Petition are not paid back in any amount. Chapter 13 is the other type of personal filing, and it includes a payment plan whereby all the creditors get a certain percentage of their money paid back, usually pennies on the dollar. Again, unsecured debts are at te bottom of the priority list, and are the least likely to be paid back.

Loans to friends may seem like a good idea at the time, but they have a very high default rate because they don’t’ have any of the formal safeguards like loans given by a lending institution, such as taking collateral, running credit checks, or other methods of determining the borrower’s ability to repay the loan.

 

DISCLAIMER: All legal principles quoted are valid as of the date of writing in the State of California. However, you should NEVER base your actions on a legal article, blog, or internet story, as facts in real life are complicated. You should have your case evaluated by an attorney experienced in the area of law needed for your case. In addition, there are often exceptions and potential changes to results that occur due to facts that you may think are trivial or unimportant. This article should not be taken in any way as legal advice on your specific legal matter.