What happens to a personal loan in bankruptcy?

Is your personal loan secured or unsecured?

A secured debt is backed by a mortgage, a pledge of collateral or another lien. An unsecured claim is one for which the creditor holds no security.1

The name of the product does not settle it. Read the loan agreement for any section about collateral or a security interest, and look for any mention of household goods, a vehicle or an account. If you are not sure what yours says, a lawyer can read it with you.

What happens to a personal loan in Chapter 7?

A Chapter 7 discharge covers debts that arose before the case was filed, unless the law lists the debt as an exception. The discharge releases you from personal liability for the debt.2 4

If the loan is secured, the lien is a separate matter. A valid lien that was not removed in the case remains on the property afterward, and the lender may enforce it to recover that property.4

For property that secures a debt, an individual in Chapter 7 files a statement of intention saying whether they will surrender the property, redeem it or reaffirm the debt. It is due 30 days after filing or by the date of the meeting of creditors, whichever is earlier.6

What happens to a personal loan in Chapter 13?

An unsecured personal loan is paid through the plan with your other unsecured debts. The plan does not have to pay those in full, as long as you commit your projected disposable income for the plan period and unsecured creditors get at least what they would in a Chapter 7 liquidation.3

If the loan is secured and you want to keep the collateral, the plan must give the lender at least the value of the collateral. Secured debts other than a mortgage on your main home can be rescheduled and spread over the life of the plan. A plan may instead provide for giving the collateral back to the lender.3 7

Can you remove a lien on household goods?

Sometimes. Bankruptcy law lets a debtor remove, or "avoid", a lien on household furnishings, household goods, clothing, appliances and similar personal items when the lender did not finance their purchase and does not hold them. The lien can be removed to the extent it gets in the way of an exemption you would otherwise have.8

Exemptions are the rules that let an individual keep certain property, and which list applies to you depends on state law. Lien removal does not happen on its own, so ask a lawyer how it is requested in your court.1 8 9

Does what you wrote on the loan application matter?

It can. A debt is not discharged to the extent the money was obtained through a written statement about your financial condition that was materially false, that the lender reasonably relied on, and that you made with intent to deceive. A separate rule covers money obtained by false pretenses, a false representation or actual fraud.10

• These exceptions are not automatic. The debt is discharged unless the lender asks the bankruptcy court to rule that it is excepted and the court grants the request.4
• If a creditor brings that challenge over a consumer debt and the debt is discharged anyway, the court must award the debtor costs and a reasonable attorney's fee when the creditor's position was not substantially justified.10
• If a lender files a challenge in your case, keep in mind that the federal courts strongly recommend getting advice from a qualified attorney.11

What happens to a co-signer?

A discharge releases you only. It does not change the liability of anyone else who owes the same debt, so the lender can still look to a co-signer.5

Chapter 13 has a special "codebtor stay" that generally stops creditors from collecting a consumer debt from someone who owes it together with you. That stay is a Chapter 13 provision, so a co-signer's position is worth raising with a lawyer before you choose a chapter.3