How Can You File for Bankruptcy on Personal Loans?
Are you in over your head financially? You are not alone, but you may be wondering, “Can you file for bankruptcy on personal loans?” While the secured debt that you owe when filing for Chapter 7 or 13 Bankruptcy will typically not be discharged during the proceedings, unsecured debt can be a different story.
When you file for bankruptcy, the process begins by choosing the appropriate type for your financial situation. Chapter 7 involves liquidation of your personal assets, where non-exempt assets may be sold to pay off creditors. Most unsecured debts like credit cards or medical bills can be discharged. Personal loans tend to be unsecured loans, meaning you aren’t required to use collateral to guarantee the loan and get fast funding.
Chapter 13 bankruptcy, on the other hand, allows you to keep your property while you follow a court-approved repayment plan, which typically lasts for anywhere from 3 to 5 years. Once your bankruptcy case is filed, an automatic stay goes into effect, which legally halts all collection activities, including calls from creditors, wage garnishments, lawsuits, and foreclosures.
A bankruptcy trustee is then assigned to your case to review your financial documents and ensure everything is handled according to the applicable bankruptcy laws in your state. In Chapter 7, this trustee may also be responsible for liquidating assets to repay creditors on your behalf. While bankruptcy can offer a financial reset, it also affects your credit and stays on your credit report for several years. Generally, it will remain on your report for up to 10 years for Chapter 7 and 7 years for Chapter 13.
Can You Get In Trouble For Not Paying a Personal Loan?
When you sign a loan agreement, you agree to the terms of the loan, which includes paying the money back in accordance with the contract. For personal loans, you are typically expected to pay off the loan in regular, equal installments over a set period of time. Whether you took out a personal loan to pay for dental bills or another personal expense, paying your loan on time each month is important. Failure to pay back your loan results in loan default, which means you are behind on your payments and your loan is no longer in good standing.
When you miss a payment, your lender will usually begin by contacting you with reminders. If the loan remains unpaid, you may be charged late fees, which increase the total amount you owe. After 30 days or more of nonpayment, the lender may report the missed payment to the credit bureaus, which can significantly damage your credit score.
Continued nonpayment of your personal loan can lead to the loan being sent to collections, where you’ll likely face aggressive attempts to recover the debt. In some cases, the lender or debt collector may file a lawsuit against you. If they win the case, they could pursue a court judgment, which might lead to wage garnishment or bank account levies, depending on your state laws. Additionally, if your loan was secured with collateral (such as a car or another asset), the lender has the right to seize that asset. Not repaying a personal loan can have long-term effects on your financial health and credit report, making it harder to qualify for future loans, credit cards, or housing.
Do Loans Go Away If You File Bankruptcy?
Yes and no. Essentially, it depends on the type of bankruptcy you decide to file and the type of debt you have. Generally, it is tough to discharge student loans or secured debt, such as mortgage payments or title loans. In Chapter 7 and Chapter 13 bankruptcy, the following unsecured debts are typically eligible for discharge:
- Credit Card Debt
- Personal Loans (Like From a Bank, Credit Union, Or Online Lender)
- Medical Bills
- Payday Loans
- Some Utility Bills And Old Rent Balances
If your personal loan is unsecured, it may be wiped out in bankruptcy. But secured loans and certain protected debts will usually remain your responsibility to pay back, even after declaring bankruptcy. For example, student loans are only discharged in rare cases where you can prove “undue hardship” during your bankruptcy proceedings in court, which is a high legal standard to meet.
What to Consider Before Filing for Bankruptcy on Personal Loans
Filing for bankruptcy on personal loans is a significant decision that requires careful consideration of several key factors. First, it’s important to determine whether your loan is secured or unsecured, as unsecured personal loans are more likely to be discharged, while secured loans may still lead to loss of collateral if payments are missed.
You should also assess your overall financial situation to determine what the right path forward is. If you’re constantly falling behind on bills or relying on credit to get by, bankruptcy might be worth exploring, but it should be a last resort after trying budgeting, debt consolidation, or negotiating with creditors through a debt repayment plan.
Keep in mind that bankruptcy has a serious impact on your credit. For example, a Chapter 7 filing stays on your credit report for 10 years, while Chapter 13 remains for 7 years. Having either filing on your credit report can make it harder to get approved for loans, rental housing, or even get hired at certain jobs. Additionally, filing for bankruptcy comes with costs, including court fees, attorney fees, and required credit counseling.
Explore Alternatives to Filing for Bankruptcy on Personal Loans
Before filing for bankruptcy on personal loans, it’s wise to explore alternative solutions such as debt management plans, debt settlement, or personal loan refinancing. Understanding the differences between Chapter 7, which eliminates most unsecured debt, and Chapter 13, which allows you to repay debt over time while keeping assets, is also crucial. Finally, think about your long-term financial goals, as bankruptcy can delay progress toward milestones like buying a home or rebuilding savings. For many, consulting a bankruptcy attorney or financial advisor is the best way to determine if it’s truly the right path.
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