When facing overwhelming debt, individuals may consider filing for bankruptcy as a solution to gain financial relief and a fresh start. Many consumers have taken out personal loans to consolidate credit card debt but for many reason are unable to make their payment. One common concern during this process is whether a personal loan can be included in bankruptcy.
When filing for bankruptcy, you can discharge certain types of personal loans, meaning you’re no longer legally obligated to repay the debt. Several factors determine whether you can discharge all or some of your personal loans, including whether the loan is secured or unsecured and whether you file under Chapter 7 or Chapter 13 bankruptcy.
Can Personal Loans Be Discharged in a Bankruptcy?
If you’re considering bankruptcy, it’s essential to understand which unsecured personal loans you can discharge and which filing method best suits your financial situation. Your bankruptcy process will be much smoother with a bankruptcy attorney familiar with the bankruptcy code to guide you.
This article will explore the types of bankruptcy, the inclusion of unsecured personal loans, and the implications of such inclusion on the borrower’s financial future.
Types of Bankruptcy
Before delving into the specifics of including an unsecured personal loan in bankruptcy, it’s essential to understand the types of bankruptcy available to individuals. The two most common forms of bankruptcy for individuals are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves the discharge of most unsecured debts. In this process, a trustee is appointed to oversee the sale of the debtor’s non-exempt assets to repay creditors. Once the assets are liquidated, any remaining eligible debts are discharged, meaning the debtor is no longer legally obligated to pay them.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as reorganization bankruptcy, allows individuals with a regular income to develop a repayment plan to pay off all or part of their debts over three to five years. Instead of liquidating assets, the debtor makes monthly payments to a trustee, who then distributes the funds to creditors. At the end of the repayment period, any remaining eligible debts may be discharged.
Including Personal Loans in Bankruptcy
Unsecured Personal Loans
The Personal loan is generally unsecured, meaning they are not backed by collateral such as a house or car. Unsecured personal loans can typically be included in both Chapter 7 and Chapter 13 bankruptcy.
- Chapter 7: In Chapter 7 bankruptcy, unsecured loans are eligible for discharge. Once the bankruptcy process is complete, the borrower is no longer required to repay these loans, providing significant relief from debt.
- Chapter 13: In Chapter 13 bankruptcy, unsecured loans are included in the repayment plan. The borrower makes monthly payments based on their income, expenses, and the amount of debt. At the end of the repayment period, any remaining balance on the personal loan may be discharged.
Secured Personal Loans
Secured personal loans, on the other hand, are backed by collateral. Including secured personal loans in bankruptcy can be more complex.
- Chapter 7: In Chapter 7 bankruptcy, secured personal loans, like a HELOC can be discharged, but the borrower may have to surrender the collateral to the lender. Alternatively, the borrower might be able to negotiate with the lender to reaffirm the debt, meaning they agree to continue making payments and keep the collateral.
- Chapter 13: In Chapter 13 bankruptcy, a secured personal loan and unsecured debt are included in the repayment plan. The borrower continues making payments on the loan through the repayment plan, and if they complete the plan successfully, they retain the collateral.
Impact of Including Personal Loans in Bankruptcy
Credit Score
Filing for bankruptcy, whether Chapter 7 or Chapter 13, significantly impacts your credit score. A bankruptcy filing can remain on your credit report for up to 10 years for Chapter 7 and up to seven years for Chapter 13. This can make it challenging to obtain new credit, secure favorable interest rates, or even rent an apartment.
Access to Credit
After filing for bankruptcy, access to credit will be limited. Lenders may be hesitant to extend credit to individuals with a bankruptcy on their record. Those who do receive credit offers may face higher interest rates and less favorable terms. However, over time and with responsible financial behavior, it is possible to rebuild credit and improve one’s financial standing.
Financial Relief and Fresh Start
Despite the negative impact on credit, including a personal loan in bankruptcy can provide immediate financial relief and a fresh start. By discharging or reorganizing unsecured debt, individuals can regain control of their finances, reduce stress, and focus on rebuilding their financial future.
Steps to Include Personal Loans in Bankruptcy
- Consult a Bankruptcy Attorney
Filing for bankruptcy is a complex legal process that requires careful consideration and planning. Consulting a bankruptcy attorney can help you understand your options, the potential outcomes, and the best course of action based on your financial situation.
- Gather Financial Documents
To file for bankruptcy, you will need to provide detailed financial information, including a list of your debts, assets, income, and expenses. Gather documents such as bank statements, loan agreements, credit card statements, and pay stubs to support your bankruptcy filing.
- Complete Credit Counseling
Before filing for bankruptcy, individuals are required to complete a credit counseling course from an approved provider. This course helps you understand your financial situation and explore alternatives to bankruptcy.
- File the Bankruptcy Petition
Once you have completed credit counseling, your attorney will help you file the bankruptcy petition with the court. This petition includes detailed information about your financial situation and a list of all your debts, including the unsecured personal loan claims.
- Attend the Meeting of Creditors
After filing the bankruptcy petition, you will be required to attend a meeting of creditors, also known as a 341 meeting. During this meeting, the bankruptcy trustee and your creditors can ask questions about your financial situation and the information provided in your petition.
- Complete the Bankruptcy Process
For Chapter 7 bankruptcy, the process typically takes a few months from filing to discharge. For Chapter 13 bankruptcy, the repayment plan lasts three to five years. During this time, it is crucial to make all required payments and comply with the court’s requirements to receive a discharge of your remaining debts.
Alternatives to Bankruptcy
While bankruptcy can provide significant relief, it is not the only option for managing overwhelming debt. Consider the following alternatives before deciding to file for bankruptcy:
- Debt Consolidation: Refinance multiple debts into a single unsecured loan with a lower interest rate can simplify payments and reduce overall interest costs.
- Second Mortgage: Homeowners should consider consolidating credit card debt into a secured loan like a home equity loan to consolidate debt with a fixed rate and fixed monthly payment.
- Debt Settlement: Negotiating with creditors to settle debts for less than the full amount owed can provide relief without the need for bankruptcy.
- Credit Counseling: Working with a credit counseling agency can help you develop a budget, manage your debts, and explore alternative solutions.
- Personal Loan for Debt Refinancing: Refinancing personal loans to secure a lower interest rate or more favorable terms can make debt more manageable.
Summary of Including Personal Loans in a Bankruptcy
Including personal loans in bankruptcy can provide significant financial relief for individuals struggling with overwhelming debt. Understanding the types of bankruptcy, the inclusion process, and the potential impact on your financial future is crucial for making informed decisions. We suggest meeting with a bankruptcy attorney and exploring all available options can help you determine the best course of action for achieving financial stability and a fresh start.
