Expert: Norma Duenas - California Bankruptcy Attorney - 10/15/2009

Question
Some months back, I'd made the horrible error of loaning to a person, whom I thought was my friend, the amount of $8K.  Luckily I did have him sign a contract promising that he "must" pay me back by a certain deadline. This date has since come and gone, and I have not even received a penny back from him. (There was even a line in the contract stating that his debt will be okay with me, if he can't pay the full amount, if he'd at least pay me $1K before the deadline.)  I'd even snail-mailed to him a letter, matter-of-factly stating that his deadline has passed, and could he please fix this situation before it escalates.

Since I've received nothing back, and my calls pleading for him to help me have gone ignored, I then went and acquired the services of a collections agency.  They have tracked him down and reported that he gave a nasty reply back, threatening that he will just slip out of this by declaring bankruptcy.  Apparently successfully doing so will relieve him of the collections people I hired and also his debt to me.  (I only hired the agency after he ignored my requests to pay me back even some of my loan, any amount; interest is not even a question, as I'm not expecting to make any profit out of this whole sorry ordeal at all.  I'd just be happy to get just my money back.)

I will admit I don't know much about bankruptcy law, having never gone broke, but what I'm learning makes me uneasy.  Does he actually face any harsh consequences himself if he does try to file for bankruptcy?  Or is it really that easy to back out of a deal between friends?  Does my loaning money to someone immediately make me a sucker?  Is there any other recourse I have available in order to recover what I've lost?

I appreciate any help you can give.  Thanks.

Answer
In Chapter 7 bankruptcy individuals can discharge unsecured personal loans which from your description, this loan appears to be. There are items that are nondischargeable in bankruptcy one of them being fraudulent loans and charges. There are numerous factors the courts use to determine whether the debt was fraudulent. Even if he files for bankruptcy you may be able to prevent him from getting this debt discharged if you can establish that the loan was fraudulent. You will have to file an objection in the bankruptcy in order for the court to review if this debt is nondischargeable. If the person obtained this loan through fraud or misrepresentation you may want to consider filing an objection in the bankruptcy if he files for bankruptcy.