Chapter 13 Bankruptcy: Understanding How To Handle And Process A Promissory Note

14 July 2015
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Instead of surrendering all assets for them to be liquefied by a bankruptcy trustee or attorney, many Americans would rather file for chapter 13 bankruptcy – also known as a wage earner's plan. Chapter 13 bankruptcy will enable you to repay all or part of your debts over three to five years under a negotiated repayment plan. This will allow you to keep your assets, protect your home from being foreclosed upon and also repay creditors with the least amount of financial strain. If you have borrowed money from your family members or relatives prior to filing for bankruptcy and have signed a promissory note, the promissory note is handled like any other loan.

What Is a Promissory Note?

A promissory note is a signed note between the lender and the borrower detailing the amount of money that was loaned, the repayment terms and the conditions should the borrower be unable to repay the loan. The promissory note should also include identification information. To make things simple, most lawyers recommend scanning a government-issued identification document as proof of identification.

If you took out a loan without signing a promissory note, you are technically bound verbally to the loan; however, in the eyes of the law, the loan is considered as a gift. In short, you are not responsible for making repayments during the bankruptcy, although you can feel free to repay the loan after you have been discharged.

How Is a Promissory Note Handled in Chapter 13 Bankruptcy?

When filing for chapter 13 bankruptcy, you must include the promissory note with your filings, and also list the lender as a creditor on your bankruptcy schedules. Your bankruptcy trustee or attorney will handle the loan stated in the promissory note in the same way as a loan given to you by any other creditor.

Basically, the attorney or trustee will calculate the amount of disposable income you have by taking your actual income and subtracting it by the state and national standards for living expenses. The disposable income will then be equally distributed to all of your creditors. For example, if 10% of your debts are owed towards a family member, 10% of your disposable income will go towards paying him or her back for the duration of your bankruptcy.

Generally speaking, you won't repay the full amount of the loan when you file for chapter 13 bankruptcy, and the lenders will receive a smaller portion of what was owed. This is negotiated and settled prior to the distribution of the assets. Once you have been discharged from bankruptcy, any remaining amount owed will be completely discharged from your record. In short, legally speaking, you won't owe a single penny more from the promissory note, even if it is not completely repaid.

It is important to include the promissory note and the loan when you file for chapter 13 bankruptcy in order to make sure your assets are distributed to the friends and family members you borrowed money from. Otherwise, they won't be seeing a penny from you during the term of your bankruptcy.


Although legally speaking you no longer have any obligations to repay the loan after you have been discharged, most people still try to do so in order to maintain a good relationship with the lender. If you are ever borrowing money from a friend or family member, draw up a proper promissory note and record the loan formally. Although this may not seem important at the time, it will protect the lender legally and will also help maintain your relationship with the lender and prevent things from going sour. 

Click here to read more about filing for bankruptcy.