What happens to my promissory note when the borrower files bankruptcy?

Collection stops immediately under the automatic stay, and the debt is folded into the case. What happens next depends on the chapter and on whether your note is secured. In Chapter 7, unsecured debts are typically discharged, meaning the personal obligation to pay you is wiped out. In Chapter 13, the borrower proposes a plan that repays creditors in part over three to five years. A recorded lien on collateral generally survives either way.

Can I keep trying to collect after they file?

No. The automatic stay takes effect the moment the petition is filed and bars calls, letters, lawsuits, garnishments, and repossessions. Violating it, even unknowingly, can expose you to damages and sanctions. If you learn a borrower has filed, stop all contact about the debt and route everything through the bankruptcy process.

What is a proof of claim and do I need to file one?

It is the form you file with the bankruptcy court stating what the borrower owes you and attaching your note. It is how you get counted as a creditor and share in any distribution. In many Chapter 7 cases there are no assets to distribute, and the court will say so; in Chapter 13 and in asset cases, missing the claim deadline can mean forfeiting your share. Watch for the notice and the bar date.

Is a secured promissory note treated differently?

Substantially. A properly recorded lien is a property interest that survives discharge. The borrower's personal liability may be wiped out, but your right to the collateral generally is not, and you can seek relief from the stay to repossess or foreclose, or the borrower may reaffirm the debt or surrender the collateral. An unperfected security interest, by contrast, usually leaves you as an ordinary unsecured creditor.

Can a debt to me survive the discharge?

Some can. Debts incurred through fraud, false financial statements, or willful and malicious conduct can be excepted from discharge, but usually only if you file an objection with the court by a short deadline after the case begins. Certain other categories, like some support obligations and recent taxes, are nondischargeable by their nature. If you believe the borrower lied to get the loan, talk to a bankruptcy attorney quickly, because the window is narrow.

The borrower filed for bankruptcy: what happens to your promissory note

A letter arrives from a bankruptcy court, or the borrower tells you over the phone, and the loan you were working to collect is suddenly inside a federal case. What you can do now is limited and what you will recover was mostly decided months ago, when you chose whether to secure the note. Here is how the process treats your claim, and the few moves still available.

Stop. The automatic stay is already in effect.

The instant a bankruptcy petition is filed, the automatic stay halts every collection effort against the borrower: calls, letters, lawsuits, wage garnishments, bank levies, and repossessions. It applies whether or not you have been notified yet. A lender who keeps calling, or who files a small claims case the week after the petition, can face damages and sanctions for violating the stay, and the ignorance defense is thin. When you learn of a filing, all communication about the debt stops, and everything moves through the court.

Chapter 7 versus Chapter 13

Chapter 7 (liquidation). A trustee sells the borrower's nonexempt assets, if any, and distributes the proceeds to creditors. Most consumer Chapter 7 cases are no-asset cases, meaning unsecured creditors receive nothing. The borrower's personal liability on dischargeable debts is then wiped out, typically within a few months.
Chapter 13 (repayment plan). The borrower keeps their property and pays creditors through a court-approved plan lasting three to five years. Unsecured creditors often receive a percentage of what they are owed, sometimes small, sometimes meaningful, depending on the borrower's income and assets.

Either way, the debt is now administered by the court, and your leverage as an individual lender is mostly gone.

File the proof of claim

The proof of claim is the form that puts you on the creditor list: who you are, what is owed, and a copy of the note attached. Without it you may not share in any distribution, and in Chapter 13 an unfiled claim can simply be left out of the plan. You will receive a notice with the case number and, in asset cases, a bar date. Calendar it. In a no-asset Chapter 7 the court will tell you not to file unless assets turn up, and you should still watch for a later notice that they have.

Create a Secured Promissory Note ($7.99) Secured vs Unsecured

Why secured lenders come out ahead

Discharge eliminates the borrower's personal obligation to pay. It does not eliminate a properly recorded lien. If your note was secured by a car, real estate, or business assets and you perfected the lien, you still have a claim on the collateral. Depending on the case, you may seek relief from the stay to repossess or foreclose, the borrower may reaffirm the debt to keep the collateral, or they may surrender it to you. An unperfected security interest, one that was written into the note but never recorded, generally puts you back in the unsecured pool. This is the moment the filing step you took, or skipped, is worth the most. See perfecting collateral liens and using a car as collateral.

Debts that can survive discharge

A narrow set of exceptions exists. Debts obtained by fraud, by a materially false written financial statement, or through willful and malicious injury can be excepted from discharge, but in most cases only if you file an objection with the bankruptcy court within a short deadline after the case begins, commonly around 60 days after the first creditors' meeting. If you believe the borrower misrepresented their finances or intentions to get the loan, consult a bankruptcy attorney immediately, because a missed deadline ends the argument. Co-signers and guarantors are a separate matter: their liability is generally not discharged by the borrower's case, so a guaranty is still collectible against the guarantor. See co-signers and guarantors.

What to do this week

Stop all collection contact and note the date you learned of the filing.
Read the court notice for the chapter, case number, creditors' meeting date, and any bar date.
Gather the signed note, the ledger, and any security documents.
File the proof of claim when directed, with the note attached.
If you hold a perfected lien, or suspect fraud, get a bankruptcy attorney involved now rather than after deadlines pass.
If the debt is discharged with nothing recovered, see writing off an unpaid note for the tax treatment.

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