Can Personal Loans Be Discharged in Bankruptcy? A Detailed Guide

Filing for bankruptcy can be a way out for individuals struggling with debt. Many wonder if personal loans can be included in bankruptcy. The simple answer is yes, personal loans can typically be included and discharged in bankruptcy proceedings. But understanding the full process is crucial to making the right decision for your financial future. In this blog, we will explore how personal loans are treated during bankruptcy, what options you have, and what you can expect throughout the process.

Key Points to Know About Bankruptcy and Personal Loans

1. Personal loans are often dischargeable in bankruptcy.
2. Chapter 7 bankruptcy allows for the discharge of unsecured debts like personal loans.
3. Chapter 13 bankruptcy requires a repayment plan before any discharge of personal loan debts.

What is Bankruptcy?

Bankruptcy is a legal process that helps individuals and businesses eliminate or repay their debts under the protection of the bankruptcy court. The goal is to give debtors a fresh start by discharging their unsecured debts or by allowing them to repay a portion of the debt under a manageable plan.

There are two primary types of bankruptcy for individuals: Chapter 7 and Chapter 13. In both cases, personal loans can generally be discharged, but the method and timing of discharge can vary.

What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

Before diving into the specifics of personal loans, it’s important to understand the difference between Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 Bankruptcy:

Chapter 7, also known as “liquidation bankruptcy,” involves the discharge of most unsecured debts. This means the debtor will no longer be responsible for paying these debts. A trustee may sell certain non-exempt assets to pay creditors, but many personal belongings are protected under exemptions. Personal loans are typically included among the unsecured debts and can be fully discharged.

Chapter 13 Bankruptcy:

Chapter 13, or “reorganization bankruptcy,” works differently. Instead of discharging debts outright, you enter a repayment plan, usually lasting three to five years. In this case, your personal loans may not be completely wiped out. Instead, you’ll need to make monthly payments based on a court-approved plan. Once the repayment period is completed, any remaining eligible debt may be discharged.

Note: Chapter 13 bankruptcy can help individuals keep their property while repaying their debts.

Here is a comparison table to help visualize the differences:

Can Personal Loans Be Included in Bankruptcy?

Yes, personal loans can be included in bankruptcy. Whether you’re filing for Chapter 7 or Chapter 13 bankruptcy, personal loans are typically considered unsecured debts, meaning they are not backed by collateral. Since most unsecured debts can be discharged in bankruptcy, your personal loans are generally eligible for discharge. However, some exceptions apply, especially if the loan was obtained under fraudulent circumstances or if there are allegations of misrepresentation.

What Happens to Personal Loans in Chapter 7 Bankruptcy?

In Chapter 7 bankruptcy, personal loans are usually discharged along with other unsecured debts. If you qualify for Chapter 7, you can have your personal loans wiped out, and you no longer have to repay them.

Note: However, if the personal loan was secured by collateral or you obtained it fraudulently, it might not be dischargeable.

Here’s an example: Let’s say you owe $10,000 from a personal loan that you used to pay off credit card debt. In Chapter 7 bankruptcy, this $10,000 can be discharged, meaning you will no longer be required to repay it.

Can Personal Loans Be Discharged in Chapter 13 Bankruptcy?

In Chapter 13, the situation is different. While personal loans can be included in the bankruptcy plan, they are not immediately discharged. Instead, you must follow a repayment plan where you pay a portion of your debt over three to five years. After completing the repayment plan, any remaining unsecured debts, including personal loans, may be discharged.

For example, if you owe $15,000 on a personal loan and qualify for Chapter 13, you may be required to pay back a portion of that debt through the repayment plan. If you complete the plan, the remaining balance could be discharged.

Note: If you fail to make your required payments under Chapter 13, your discharge could be denied.

Can Personal Loans from Friends or Family Be Discharged?

Personal loans from friends or family are treated similarly to other personal loans. If the loan is unsecured, it can likely be discharged in bankruptcy. However, there may be a closer relationship with the lender, which could complicate matters. If there is evidence of fraud, or if the loan was made with the understanding that it wouldn’t be discharged, you could face issues during bankruptcy proceedings.

Are There Any Exceptions to Discharging Personal Loans in Bankruptcy?

While most personal loans are dischargeable, there are a few exceptions. For example, loans taken under fraudulent pretenses or loans for luxury goods within 90 days of filing for bankruptcy are harder to discharge. Additionally, some secured personal loans that are backed by collateral (like a car loan) may not be discharged if you want to keep the collateral.

Conclusion

In conclusion, personal loans are generally dischargeable in bankruptcy, whether through Chapter 7 or Chapter 13. However, the way they are handled depends on the type of bankruptcy you file. Chapter 7 allows for a faster discharge, while Chapter 13 requires repayment over several years before any discharge occurs.

If you are struggling with personal loan debt and considering bankruptcy, it’s important to speak with a bankruptcy attorney to determine the best course of action based on your financial situation. They can guide you through the process and help you understand the implications for your personal loans.

FAQ’s

Can personal loans from family members be discharged in bankruptcy?
Yes, personal loans from family members can be discharged in bankruptcy, but there may be complications depending on the circumstances of the loan.

How long does bankruptcy take to discharge personal loans?
 In Chapter 7 bankruptcy, personal loans can be discharged within a few months. In Chapter 13, the repayment plan lasts 3-5 years, and the discharge happens after completing the plan.

Can I still keep my assets if I file for Chapter 7 bankruptcy to discharge personal loans?
 In Chapter 7 bankruptcy, some assets may be sold to repay creditors, but many assets are protected by exemptions. Speak with a bankruptcy attorney to understand what is exempt in your state.

Are there any personal loans that cannot be discharged in bankruptcy?
 Personal loans obtained fraudulently or those secured by collateral may not be discharged in bankruptcy. Additionally, luxury goods purchased shortly before filing may not be dischargeable.

How do I know if bankruptcy is the right choice for discharging my personal loans?
Consult with a bankruptcy attorney to review your financial situation and determine if filing for bankruptcy to discharge personal loans is the best option for you.