Personal loans can be included in bankruptcy, but it depends on the type of bankruptcy you file. If you file Chapter 7 bankruptcy, most unsecured debts like personal loans may be wiped out. However, if you file Chapter 13 bankruptcy, you may have to repay some or all of your personal loan debt.
What Happens When You File For Bankruptcy
Filing for bankruptcy is a legal process that allows individuals or businesses to reorganize their finances and get relief from their creditors. When you file for bankruptcy, an important part of the process is listing all of your debts. This includes any personal loans that you may have.
Once your bankruptcy case is underway, the court looks at your debts and determines which ones can be discharged – eliminated – and which ones must be repaid. This determination depends on the type of bankruptcy, whether the debt is secured, and the amount of the debt.
Types of Bankruptcy
There are two main types of bankruptcy that apply to consumers – Chapter 7 and Chapter 13—each of which is appropriate under certain circumstances. Here’s what you need to know about the two most common forms of bankruptcy:
- Chapter 7 bankruptcy: Chapter 7 is a legal proceeding that allows individuals or businesses to get relief from their creditors and discharge their debts. After a debtor files Chapter 7 bankruptcy, the debtor typically surrenders all of their nonexempt property to a trustee who then liquidates it to pay off the creditors. This option is best for borrowers who need to discharge unsecured debts – including personal loans.
- Chapter 13 bankruptcy: In a Chapter 13 bankruptcy, the debtor creates a repayment plan to repay their debts over a three- to five-year period. The consumer also benefits from a freeze on collections and a temporary pause on any foreclosure and repossession proceedings.
What Happens To Personal Loans After Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, most unsecured debts can be discharged – including personal loans. This means you will no longer be responsible for repaying the debt and the lender cannot take any action to collect it from you.
What Is Not Dischargeable in Chapter 7?
There are 19 categories of debt that are not dischargeable in a Chapter 7 bankruptcy. This is because nonpayment of these debts runs counter to public policy. If you have any of these types of debts, you are still responsible for repaying them even if you file for Chapter 7 bankruptcy. These include, but are not limited to:
- Child support and attorney fees in child custody and support cases
- Spousal support or alimony
- Student loans, with some limited exceptions for undue hardship
- Prior recorded tax liens
- DUI-related personal injury debts
Likewise, some debts may be deemed nondischargeable if a creditor objects to their being wiped out. For example, a creditor may ask a bankruptcy court to hold the consumer responsible for the following debts:
- Credit card purchases for luxury items totaling more than $800 to a single creditor within 90 days of the bankruptcy filing
- Cash advances greater than $1,100 from a single creditor within 70 days of the bankruptcy filing date
- Debts incurred through fraud or misrepresentation, such as falsification of income information on a credit application
- Debts obtained as a result of willful and malicious injury to a person or property
How Personal Loans Are Included In Chapter 13 Bankruptcy
Chapter 13 bankruptcy treats debt differently than Chapter 7, and you may have to repay some or all of your personal loan debt depending on whether they are secured or unsecured. This is because Chapter 13 bankruptcies involve creating a repayment plan to repay your debts over a three- to five-year period.
The amount you are required to pay under your Chapter 13 plan is based on types of outstanding debt, value of your property, income, and expenses. Your personal loan debt will be included in this repayment plan and you will be required to make payments on it along with your other debts. Once plan payments are complete, remaining balances that qualify for discharge are wiped out.
Here’s how certain types of personal loans and other debt are treated in Chapter 13 plan:
- Nonpriority unsecured debt: This is how most personal loans are categorized, along with credit card balances, medical bills, and utility payments. After a consumer completes their Chapter 13 repayment plan, most outstanding nonpriority unsecured debts are discharged, with the exception of student loans.
- Priority unsecured debt: Priority claims are those that receive special treatment in bankruptcy proceedings, such as bankruptcy administration costs and child and spousal support obligations. These debts must be fully repaid under a Chapter 13 plan.
- Secured debt: If your personal loan is secured, the loan must be paid off or the collateral must be surrendered.
Notably, some of the debts that are nondischargeable in a Chapter 7 bankruptcy, may be discharged in Chapter 13. Debts that can be wiped out in Chapter 13 include non-criminal government fines and penalties, non-support marital debts, and debts that could not be discharged in a previous bankruptcy.
What Bankruptcy Doesn’t Do
Bankruptcy is not a get-out-of-jail-free card. Just because you file for bankruptcy does not mean that all of your debts will be discharged. In fact, certain types of debts like child support, alimony, and student loans are not dischargeable in Chapter 7 or Chapter 13 bankruptcy.
Additionally, filing for bankruptcy does not mean that you will never have to repay your debts. If you have assets that can be liquidated, you may be required to repay some or all of your debts in a Chapter 13 bankruptcy.
If you are struggling to repay your personal loan debt, bankruptcy may be an option for you. Ultimately, though, you should speak with an experienced bankruptcy attorney to understand how your personal loans will be treated and what the best option is for your situation.
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