How are Personal Loans Handled in Bankruptcy?

A personal loan, or a signature loan, is an unsecured debt.  It is not backed by any collateral, like an equity line of credit is backed by a house or a car loan can be “secured” or backed by the value of a car.  Personal loans, like credit card debt, can be part of the debt that is included when you consider filing for bankruptcy. According to US law, you have recourse when you feel you can no longer pay your creditors, and this recourse is bankruptcy. 

Bankruptcy and Personal Loans

When you consider bankruptcy to erase personal loan debt, you must first determine which form of bankruptcy to file.  There are primarily two forms of personal bankruptcy, Chapter 7 or Chapter 13 bankruptcy. 

• Chapter 7 Bankruptcy

Chapter 7 bankruptcy allows you to discharge, or be relieved of all or part of your debt, including unsecured debt like personal loans.  You do this after your liquid assets have been used to pay off some of your debts.   

For example, with Chapter 7 bankruptcy, money you have in bank accounts may be distributed by the court, to your various creditors to pay off all or portions of the money you owe.  There are certain specific assets that are exempt from this bankruptcy, such as some home equity, but the sale of assets in a bankruptcy sale can be one way to remove the burden of excessive personal loan debt.  Once all of your liquid assets have been used up, the rest of your personal loan debt is discharged by the bankruptcy. 

To file for Chapter 7 bankruptcy, you must be able to prove that your family income is less than the median income of families in your state.  If you don’t meet this standard, you can still file for Chapter 13 Bankruptcy.

• Chapter 13 Bankruptcy

Instead of discharging all of your personal loan and other debt, as with Chapter 7 bankruptcy, Chapter 13 bankruptcy involves you repaying all or part of your debt over three to five years.  You essentially develop a repayment plan through this form of bankruptcy, and you make payments to the court, which then pays your lenders directly.  While your creditors may disagree with portions of your repayment plan, the judge makes the ultimate decision in Chapter 13 cases.  Once you have completed the payments according to your repayment plan, any remaining debt is discharged.   If you want to keep your liquid assets, Chapter 13 may be better for you.  It is also your only option if you have income above the median family income in your state.

Getting Help

If you have been having trouble with personal loan debt, a phone call to a bankruptcy attorney can be helpful as you can learn about your options. Your attorney can provide you with specific details about what your options are and can help you actually go through the process of filing.