I'm gonna be contrary and say it's nothing to do with the money, it's obviously his underlying psychoses playing up: he's upset at your fight and he's subconsciously transferring his anger at you/pain at losing your friendship into a money issue.
It's possible that if you paid him he would find something different to complain or threaten you about, any excuse to stay angry and in touch with you. It's also possible that in 1 or 3 or 18 months when he's back to having a "good year" as you called it he'll not only forget about the money but also conveniently pretend that your bust-up never even happened.
As far as dealing with it, there's two ways to play it really: if he has no history of violence and you don't really think he might actually make good on his threats, it might be easiest and most convenient to ignore him, cut all contact (as every word your say, no matter how friendly and conciliatory, will just fuel his paranoia as he'll imagine that you're trying to hoodwink him) and wait for him to get better. The other option (and the better one I think, especially if you're scared he might really hurt you!) is to do what this guy said:
On a serious note which you clearly want if has serious mental issues the I would report to police and his last point of contact with who he got help from last time,
In the long maybe long long run he will thank you , at worst it will save you from him
A friend of mine has also suffered from some mental health issues, and he went through a period of harassing a girl who threatened to report him to the police. I asked a mental health professional how we (his friends) should deal with this, given that repeatedly asking/begging/threatening him to stop what he was doing didn't work, and the reply was that her reporting him to the police might not be the worst option, harsh as it may sound, as a. it might shock him into seeking treatment, or b. if he still won't seek treatment, a police report on file might be a useful tool if it became necessary to section him.
I know that sounds cruel and harsh (trust me I DO know, whether to have one of your closest friends sectioned is a very depressing conversation!) but you have to remember that people suffering some some kind of delusion or paranoia don't understand that they're not well. They know SOMETHING is wrong, but they usually rationalise it and think that it's the world that's wrong, not they! And sometimes a few days in a padded cell under anti-psychotics can bring them the clarity they need to understand what's happening to them and the confidence to ask for help.
I wouldn't just pick up the phone and call the cops immediately though: you should probably go talk to a social worker or (preferably) a psychiatrist before doing anything, as your friend's circumstances might be different, his condition might already be regulated, he might even already be taking medication for all you know (in which case it's probably not the disease, he's just genuinely ****ed off at you and wants his money back!

), and reporting him or sectioning him wouldn't accomplish anything. Ideally you should go to someone who treated him, if you have that information (his ex partner might). Bottom line is: seek better advice than you can get on this forum!
