Can Personal Loans Be Relieved in Bankruptcies? What You Need To Know
Written by
Karen Doyle
Edited by
Melanie Grafil
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If you’re in a financial situation in which you may be considering bankruptcy, you may want to know if personal loans are discharged in bankruptcy. In some cases, personal loans can be relieved in bankruptcy. It will depend on the type of bankruptcy you file and your personal financial situation.
Here’s what you need to know.
Bankruptcy Basics
There are several different types of bankruptcy, but most individuals will file either Chapter 7 or Chapter 13. Both types of bankruptcy will ultimately resolve much of your debt, but there are differences.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy provides for the liquidation of the debtor’s property to satisfy the debts, to the degree possible. To qualify for Chapter 7 bankruptcy, you must pass a “means test” that indicates that you do not have the means to pay off your debt according to the terms you agreed to when you acquired the debt.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy provides for a repayment plan for the debtor to pay back some or all of the debt. If you have regular income, you may qualify for a repayment plan that lasts from three to five years. Once you have completed the repayment plan, the debt is discharged.
You can file for bankruptcy on your own or a bankruptcy attorney can help you. Consult your local bankruptcy court — there’s one in every judicial district in the country — to determine how to file and what information you need.
Filing for bankruptcy can be a way to get a fresh start if you are overwhelmed by debt. The process stops collection efforts and wage garnishments and can provide relief from your debt.
Are Personal Loans Discharged in Bankruptcy?
Unsecured personal loans will usually be discharged in bankruptcy.
If you file for Chapter 7, your loan will be included among your nonexempt debt for discharge.
If you file for Chapter 13, an unsecured personal loan will be included as part of your court-approved repayment plan. Of course, you must list the loan in your petition for bankruptcy for it to be included.
What Types of Loans Can’t Be Discharged?
While personal loans will often be discharged in bankruptcy, there are several kinds of debt that will not be. These include, but are not limited to:
- Student loans — usually
- Child support or alimony
- Certain tax debts
- Court fines or judgments for fraud
- Debts owed to certain tax-advantaged retirement plans
This list is not exhaustive, so be sure to understand which of your debts will be exempt from bankruptcy before you file.
Chapter 7 vs. Chapter 13: What’s the Difference for Personal Loans?
The differences between Chapter 7 and Chapter 13 bankruptcy are broken down in the chart below.
| Feature | Chapter 7 | Chapter 13 |
|---|---|---|
| Debt relief type | Most unsecured debt wiped out | Repayment plan over 3 to 5 years |
| Time to complete | Around 3 to 6 months | 3 to 5 years |
| Keep property? | May need to sell non-exempt items | Can keep property with payment plan |
| Personal loan impact | Likely discharged | Partially repaid or discharged |
What Disqualifies You From Filing Bankruptcy?
Bankruptcy is intended to be a last resort – a solution when all other possibilities have been exhausted. You must qualify for bankruptcy, which typically means proving that you do not, and will not, have the ability to repay what you owe.
Not everyone who wants to file for bankruptcy will qualify. Here are some reasons why you could be disqualified from filing for bankruptcy.
- Too much income, for the Chapter 7 means test
- Previous recent bankruptcy filing
- Not completing required credit counseling
- Bankruptcy fraud or dishonesty
I Can’t Pay My Personal Loan — What Should I Do?
If you can’t make the required payments on your personal loan, there may be a less aggressive solution than bankruptcy. Here are some things you can try first.
1. Contact Your Lender for Hardship Options
As soon as it becomes apparent you will not be able to make a payment, contact your lender. They know that if you file for bankruptcy, they will get little if any of their money back, so they may be eager to work with you to try to come up with a workable solution.
2. Consider Debt Consolidation or Settlement
A debt consolidation program or settlement may be an option for you, as long as you are certain that you will be able to make the consolidated or agreed-upon payments.
3. Explore Nonprofit Credit Counseling
There are several organizations that can help you learn how to manage the debt you have and use future credit wisely. Be sure to use a program approved by the U.S. Department of Justice and isn’t a for-profit company.
Bankruptcy should be a last resort, considered only after you have explored every other option. Be sure to understand all the consequences of filing for bankruptcy, which can affect you for years.
Getting a Personal Loan After Discharge Under Chapter 7
If you proceed with bankruptcy and have loans discharged under Chapter 7, you may still be able to get a personal loan in the future. However, you can expect to pay a higher interest rate and have stricter terms for timely payments.
To rebuild your credit after a bankruptcy, you may want to start with a secured credit card or credit builder loan. These require that you pay a deposit equal to your credit limit and make timely payments whenever you access the credit limit. You’ll need to slowly rebuild your credit and to show consistent income.
Some lenders specialize in post-bankruptcy loans, so you may be able to find one that will give you a loan. The interest rate will likely be higher than it would be if you had not filed for bankruptcy.
Banks That Work With Bankruptcies for Personal Loans
Some banks and credit unions will also work with loan applicants who have been through bankruptcy.
Look for lenders who advertise that they offer “bad credit loans,” or “bankruptcy OK.”
Credit unions may offer more flexibility than banks, especially if you already have a relationship with them. Online lenders may also offer options for discharged bankruptcies.
When comparing lenders, be sure to watch out for high fees and high interest rates.
FAQ: Personal Loans and Bankruptcy
Overwhelmed by debt? Take a look at this FAQ to see learn more about getting relief through bankruptcy.- Can I include a personal loan in my bankruptcy?
- Yes. Most personal loans can be included in bankruptcy, so be sure to include them in your filing.
- What happens to my personal loan in Chapter 7?
- Most personal loans will be discharged in Chapter 7 bankruptcy.
- Will I ever be able to get a loan again after bankruptcy?
- Yes. Be sure to comply with all terms of your bankruptcy so that it's discharged completely. You should be able to show consistent income, and you may have to start with a secured loan.
- What if I didn't list my personal loan in the filing?
- If you don't list a personal loan in your bankruptcy filing, it may not be discharged, and the creditor can continue collection efforts. If you didn't list in intentionally, you could be charged with bankruptcy fraud.
- How soon after bankruptcy can I apply for credit?
- When your bankruptcy has been discharged by the court, you can apply for credit. It usually takes four to six months for Chapter 7, and three to five years for Chapter 13, because you need to complete the payment plan. Check your credit report to be sure your debts have been discharged. Be sure you can show consistent income and look for lenders who accept borrowers with poor credit.
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- USCourts.gov. "Process - Bankruptcy Basics."
- U.S. Trustee Program. "List of Credit Counseling Agencies Approved Pursuant to 11 U.S.C. § 111."
