Can Personal Loans Be Included in Bankruptcy? What To Know

Yes, personal loans can usually be included in bankruptcy because they're typically unsecured debt.

What happens next depends on whether you file Chapter 7, which can discharge a personal loan in about three to six months, or Chapter 13, which folds it into a three-to-five-year repayment plan.

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Key Takeaways

• Most personal loans are dischargeable. Chapter 7 typically wipes out unsecured personal loans within three to six months, according to U.S. Courts.

• Chapter 13 works on a longer timeline. Instead of a quick discharge, your personal loan debt gets folded into a court-approved repayment plan lasting three to five years.

• Not every debt goes away. Child support, alimony, certain tax debts and fraud-related court judgments typically survive bankruptcy no matter which chapter you file.

• Secured personal loans work differently. You can keep the collateral by reaffirming the debt, or surrender it and possibly discharge what's left over.

• Eligibility has rules. Chapter 7 requires passing a means test, and refiling for another Chapter 7 discharge generally requires an eight-year wait from your last filing date.

• Rebuilding is possible. A credit builder loan or secured card, paired with consistent, on-time payments, can help you start building credit again after discharge.

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Can You Include a Personal Loan in Bankruptcy?

You can include a personal loan in a bankruptcy filing, and in most cases it can be discharged. Chapter 7 and Chapter 13 are the two bankruptcy types most people use, and both can resolve personal loan debt, just on very different timelines.

Before you consider either one, it's worth trying other options first, since bankruptcy is meant to be a last resort.

How Are Personal Loans Treated in Chapter 7 vs. Chapter 13?

Personal loans are typically discharged faster in Chapter 7 than in Chapter 13, but Chapter 13 lets you keep more property along the way. Here's how the two compare:

Are Secured Personal Loans and Co-Signers Treated Differently?

Secured and unsecured personal loan balances can both be discharged, but including a secured loan in bankruptcy could cost you the collateral behind it. A discharge releases you from personal liability for the debt, but it doesn't erase the creditor's lien on whatever secures the loan, according to U.S. Courts. That means a creditor may still be able to seize the collateral unless an exception applies.

You do have a few options with secured personal loans:

• Reaffirm the debt. Under Chapter 7, you and the creditor can agree that you'll keep paying the loan instead of discharging it, which lets you keep the collateral.

• Surrender the collateral. Under either chapter, you can hand over the collateral to the creditor. Any remaining balance after the sale may become unsecured, which could mean repaying less of it.

Co-signers are treated differently from the primary borrower. Filing for bankruptcy relieves you of your own obligation, but that relief usually doesn't extend to a co-signer, who may still be responsible for the balance even after your debt is discharged. A co-signer facing that situation can look into filing for their own bankruptcy protection if other options run out.

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Which Debts Can't Be Discharged in Bankruptcy?

Several categories of debt typically survive bankruptcy no matter which chapter you file, so it's worth reviewing your full debt picture before you decide.

This list isn't exhaustive, so confirm which of your specific debts qualify for discharge before you file.

Do You Qualify To File for Bankruptcy?

Bankruptcy is meant to be a last resort, and not everyone who wants to file will qualify. Here's what each chapter generally requires:

• Chapter 7: You'll need to pass a means test that compares your income to your state's median income, showing you don't have enough disposable income to repay your debts.

• Chapter 13: You'll need to show regular income that can support a court-approved repayment plan.

• No recent discharge. You generally can't get another Chapter 7 discharge until eight years have passed since your prior Chapter 7 filing date, or two years for a repeat Chapter 13 discharge, per federal bankruptcy law.

• Credit counseling. Completing an approved credit counseling course is required before you file.

• No history of bankruptcy fraud.

What Should You Do if You Can't Pay Your Personal Loan?

If a personal loan payment is starting to feel out of reach, there may be less drastic options than bankruptcy. Here's where to start:

1. Contact your lender about hardship options. Reach out as soon as you know a payment is at risk. Lenders often prefer working out a plan over getting little to nothing back through a bankruptcy filing.

2. Look into debt consolidation or settlement. A debt consolidation program or settlement can help, as long as you're confident you can keep up with the new payment terms.

3. Talk to a nonprofit credit counselor. Choose a program approved by the U.S. Department of Justice, not a for-profit company, to get help managing debt and using credit going forward.

For more ideas, compare debt relief options or explore other ways to pay off debt before deciding bankruptcy is your best move.

Can You Get a Personal Loan After Bankruptcy?

Yes, though you may need to wait roughly a year or two after your debts are discharged before lenders will consider you again. Keep in mind that a Chapter 13 filing can stay on your credit report for about seven years, while Chapter 7 can stay on for about 10 years, both counted from your filing date.

During that window, you can expect higher interest rates and stricter terms until you rebuild your credit profile. Once you've shown consistent income and improved credit, you may qualify for an unsecured personal loan with better terms.

Where Can You Find Lenders That Work With Bankruptcies?

Online lenders may offer more flexibility for borrowers with a discharged bankruptcy than traditional banks. Look for lenders that mention working with applicants who have lower credit, such as those offering personal loans for bad credit or hardship loans. Approval isn't guaranteed, and rates will likely run higher than what borrowers with strong credit qualify for, so it's worth comparing options from a few lenders before you commit.

As more time passes and the bankruptcy's effect on your credit score fades, a credit union, especially one you already belong to, may offer more favorable terms than a bank, which often has stricter requirements.

Common Mistakes To Avoid

• Taking out new credit right before filing. A loan taken out shortly before a bankruptcy filing can trigger a fraud presumption, and a court may refuse to discharge that debt.

• Assuming all debt disappears. Confirm which debts are excluded from discharge before you file so there are no surprises afterward.

• Skipping hardship options first. Contacting your lender or a nonprofit credit counselor before filing can sometimes resolve the issue without bankruptcy at all.

Bottom Line

Personal loans can often be included in bankruptcy, and Chapter 7 or Chapter 13 will typically resolve most or all of the balance, depending on which one you qualify for. Since the process can take anywhere from a few months to five years and affects your credit report for years afterward, it's worth trying hardship programs, consolidation or nonprofit credit counseling first. Once you've filed and been discharged, focus on rebuilding your credit with tools like a secured card or credit builder loan.

Key Terms

• Chapter 7 bankruptcy: A federal process that liquidates a debtor's nonexempt assets to help pay off debts. Most unsecured debt, including personal loans, is typically discharged within three to six months.

• Chapter 13 bankruptcy: A federal process for debtors with regular income who repay some or all of their debt through a court-approved plan lasting three to five years.

• Discharge: A court order releasing a debtor from personal liability for certain debts. Alimony and some tax debts are generally excluded.

• Unsecured loan: A loan not backed by collateral, such as most personal loans or credit cards, which is generally eligible for discharge.

• Means test: A calculation comparing a debtor's income to their state's median income to determine Chapter 7 eligibility.

• Wage garnishment: A legal process letting creditors collect unpaid debt directly from a paycheck. Filing for bankruptcy can pause active garnishments through an automatic stay.

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Sources

• U.S. Courts: Chapter 7 Bankruptcy Basics

• U.S. Courts: Chapter 13 Bankruptcy Basics

• U.S. Courts: Discharge in Bankruptcy Overview

• Consumer Financial Protection Bureau: Secured vs. Unsecured Loans

• Consumer Financial Protection Bureau: Wage Garnishment

• Cornell Law School Legal Information Institute: 11 U.S.C. § 524 (Reaffirmation)

Summary generated by AI, verified by MoneyLion editors

FAQ

Here are quick answers to common questions about personal loans and bankruptcy.

Can I include a personal loan in my bankruptcy filing? Yes. Most personal loans are unsecured debt, which makes them eligible for discharge under either Chapter 7 or Chapter 13, so you'll want to list them in your filing along with your other debts.

What happens to my personal loan under Chapter 7? A Chapter 7 filing typically discharges unsecured personal loan balances within a few months, as long as the loan doesn't fall into an excluded category like fraud-related debt.

Does a secured personal loan get treated the same as an unsecured one? It can be discharged the same way, but you may lose the collateral tied to it unless you reaffirm the debt or the value of the collateral is low enough that surrendering it makes more sense.

What if I took out a personal loan shortly before filing? A loan taken out right before a bankruptcy filing can raise a fraud concern, and a creditor may ask the court to exclude that specific debt from discharge.

How soon after bankruptcy can I qualify for a new personal loan? Many people can qualify again within about a year or two after discharge, though rates tend to be higher until credit has had time to recover.

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