can personal loans be releaved in bankruptcies

Filing for bankruptcy is a legal way to get a fresh start if you’re overwhelmed by debt. But many people are uncertain about which types of debt, like personal loans, can be discharged. If you’re wondering whether personal loans can be relieved in bankruptcies, you’re not alone. Let’s dive into how personal loans are treated in bankruptcy and how filing for bankruptcy can provide relief.

Key Points to Understand:

• Chapter 7 bankruptcy can discharge most personal loans.
• Chapter 13 bankruptcy offers a repayment plan for unsecured debt.
• The nature of the loan and your bankruptcy type determines whether relief is possible.

What Are Personal Loans?

Before delving into bankruptcy, it’s important to understand what personal loans are. Personal loans are typically unsecured debts, meaning they don’t require collateral like a house or a car. You can use personal loans for a variety of reasons, such as medical bills, home improvement, or debt consolidation. Because they are unsecured, these loans can be discharged in bankruptcy, though there are some exceptions.

Personal loans can come from banks, credit unions, or even family and friends. When you’re struggling financially, it might be tempting to take out loans to cover expenses. However, if you’re considering bankruptcy as a way to relieve your financial burden, knowing how personal loans fit into the process is crucial.

Can Personal Loans Be Discharged in Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is often referred to as liquidation bankruptcy. In this type of bankruptcy, most unsecured debts, including personal loans, can be discharged or forgiven. This means you no longer have to repay the loans, and creditors cannot continue to pursue you for payment. However, there are certain conditions to consider.

Conditions for Discharging Personal Loans:

1. Unsecured loans: Personal loans that are unsecured are more likely to be discharged in Chapter 7 bankruptcy.
2. Fraudulent loans: If the loan was obtained through fraudulent means or misrepresentation, it may not be discharged.
3. Secured loans: If a personal loan is backed by collateral, like a car or a house, it may not be discharged unless you surrender the collateral.

Personal loans from friends and family are also generally dischargeable, but if there is suspicion of fraud or improper intent, they may not be.

Example:

Suppose you took out a personal loan to pay for medical expenses, and now you’re filing for Chapter 7. Since the loan is unsecured and there’s no fraud involved, the loan may be discharged, and you won’t have to repay it.

Table 1: Dischargeable vs. Non-Dischargeable Loans

Can Personal Loans Be Discharged in Chapter 13 Bankruptcy?

Chapter 13 bankruptcy works differently than Chapter 7. Instead of wiping out your debts, Chapter 13 provides a repayment plan. You’re still required to repay some or all of your debts over a three- to five-year period, depending on your income and the plan approved by the court.

Personal loans can be part of this repayment plan, and they may be reduced or completely forgiven, depending on your ability to pay. It’s important to note that the discharge isn’t immediate. After completing the repayment plan, the remaining unsecured debt, including personal loans, may be discharged.

How Chapter 13 Affects Personal Loans:

1. Repayment Plan: The plan consolidates your debt, making it easier to repay over time.
2. Debt Reduction: Some personal loans may be reduced or forgiven after the repayment period.
3. Court-Approved: The repayment plan is created by the court, and all creditors, including those holding personal loans, must abide by it.

Example:

Imagine you owe $10,000 in personal loans and are filing for Chapter 13 bankruptcy. Through the repayment plan, you may end up paying a reduced amount based on your income and expenses. After completing the plan, the remaining balance on those loans could be discharged.

Table 2: Chapter 7 vs. Chapter 13 Bankruptcy for Personal Loans

Can Personal Loans from Family and Friends Be Discharged in Bankruptcy?

Personal loans from family or friends are treated the same as loans from a bank or credit union in a bankruptcy case. However, there may be additional challenges. If the loan was taken with the intention of paying it back later and there’s no suspicion of fraud, it can be discharged.

Special Considerations:

1. Emotional Impact: Discharging family loans can cause strain on personal relationships.
2. Loan Terms: If the loan was informal (no written agreement), it might be harder to prove its legitimacy in bankruptcy court.
3. Fraudulent Intent: As with other loans, fraudulent intentions could lead to the loan being excluded from discharge.

Example:

If your parents lent you money without formal terms and you file for bankruptcy, the court might still discharge the debt as long as the loan isn’t tied to fraud or bad faith.

When Can Personal Loans Not Be Discharged in Bankruptcy?

There are certain scenarios where personal loans cannot be discharged in bankruptcy:

1. Fraudulent Loans: If you took out a loan with the intent to deceive the lender or filed for bankruptcy shortly after taking out the loan, it may be excluded from discharge.
2. Secured Loans: If a loan is secured by collateral (like a car loan or mortgage), it is generally not discharged unless you surrender the collateral.

Notable Exceptions:

• Student Loans: While they are usually not discharged, they might be forgiven in cases of severe financial hardship.
• Tax Debts: Personal loans used to pay taxes might not be discharged, depending on the specifics.

Note: Secured loans may only be relieved if the collateral is given up.

Note: Chapter 7 bankruptcy can offer faster relief, but Chapter 13 may be better if you can afford a repayment plan.

Conclusion: Can Personal Loans Be Relieved in Bankruptcy?

In conclusion, personal loans can be relieved in bankruptcy, but the process depends on the type of bankruptcy you file. Chapter 7 provides the quickest relief, discharging most unsecured debts, including personal loans. However, Chapter 13 offers an opportunity for a repayment plan, which may reduce or eliminate personal loan debt over time. Always consult with a bankruptcy attorney to understand how your loans will be handled and what the best course of action is for your financial situation.

FAQ’s

Q1: Can personal loans from a bank be discharged in Chapter 7 bankruptcy?
 A1: Yes, personal loans from banks are typically unsecured and can be discharged in Chapter 7 bankruptcy, provided there is no fraud involved.

Q2: Can personal loans from family members be discharged in Chapter 13?
 A2: Yes, personal loans from family members can be part of your repayment plan in Chapter 13 bankruptcy and may be reduced or forgiven after the plan is completed.

Q3: Are all personal loans discharged in bankruptcy?
 A3: No, personal loans that are secured or obtained through fraud are not typically discharged in bankruptcy.