When filing for bankruptcy, you can discharge certain types of personal loans, meaning that you’re no longer legally responsible for paying off the debt.
A variety of factors determine whether or not you’ll be able to discharge all of certain personal loans, including whether the loan is secured or unsecured and whether you file via Chapter 7 or Chapter 13 bankruptcy.
If you’re considering filing for bankruptcy, you need to know what personal loans you can discharge and which filing method best suits your financial situation.
What’s the Difference Between Secured and Unsecured Personal Loans?
In order to plan out your financial future, you need to understand the difference between secured and unsecured loans.
Unsecured loans are loans that don’t have collateral. If you fail to repay an unsecured personal loan, the lender cannot repossess your assets. Common unsecured loans include:
- Bank loans with no collateral
- Payday loans
- Signature loans
- Personal loans from lenders that you know, such as acquaintances, co-workers, employers, friends, and family
In addition to unsecured personal loans, there are other types of unsecured debts, such as:
- Medical bills
- Repossession deficiency claims
- Old lease balances
- Credit card debts
- Unpaid utility bills
- Some attorney fees
- Dishonored checks
Unlike unsecured personal loans, secured loans involve some form of collateral that the lender can repossess if the borrower fails to make payments. The most common types of secured personal loans are vehicle loans and home mortgages. Other types include seller financing, personal loans that involve pledged collateral, and any other loan that involves collateral.
Discharging Personal Loans Through Chapter 7 Bankruptcy
Whether or not you should discharge a personal loan in Chapter 7 bankruptcy will depend on if the loan is secured or unsecured.
You can discharge an unsecured loan regardless of its status whether it’s current, delinquent, or in default. Additionally, you can discharge a loan regardless of whether the original lender has the loan or whether the lender sold it to a collection agency or debt buyer.
A bankruptcy filer can also discharge an unsecured personal loan when there’s a lawsuit revolving around it. Even if a creditor has initiated a wage garnishment you can still discharge the unsecured loan in Chapter 7 bankruptcy.
You can discharge a secured personal loan, but this differs from discharging unsecured loans because you’ll need to surrender your secured loan’s collateral. For example, if you want to discharge the loan associated with your car, you’ll need to give up your vehicle. If you wish to keep your car, you’ll need to pay for it. This is also the case when it comes to home mortgages and most other types of loans that involves collateral.
Discharging Personal Loans Through Chapter 13 Bankruptcy
Like with Chapter 7, you can discharge an unsecured personal loan after bankruptcy by filing Chapter 13, and you complete this process by completing a Chapter 13 plan. The Chapter 13 plan reorganizes your various debts, including personal loans, into a monthly payment plan that lasts three to five years.
If you file through Chapter 13, your repayment plan amount will depend on your income, expenses, property, and your different types of debt. Unlike Chapter 7 bankruptcy, you’ll pay part of the money you owe on unsecured debts, but most Chapter 13 payment plans reduce the total amount you’ll need to pay on your different debts.
With secured personal loans, you need to pay a required amount either through the plan or during the plan. You can also surrender the loan’s collateral in order to discharge the debt. But, fortunately, people that are behind on secured debts can use Chapter 13 to return to good standing on secured debts. People often file Chapter 13 to catch up on house payments or vehicle loans.
When it comes to car loans, filers often use Chapter 13 to reduce loan interest rates and, in some circumstances, reduce vehicles’ principal balances.
Getting a Loan After Filing for Bankruptcy
Although bankruptcy is sometimes the best solution for getting your finances back on track, it can impact your ability to qualify for a new personal loan. Banks that work with bankruptcies for personal loans are available, but your ability to find a reasonable personal loan will depend on when you filed for bankruptcy, how the bankruptcy impacted your credit score and history, your income, and whether the new loan is secured or unsecured.
When a person files for Chapter 7 bankruptcy, it will remain on their credit report for ten years. Chapter 13 bankruptcies remain on credit reports for seven years. That does not mean that loans are not available for that period of time. Most people that file bankruptcy can rehabilitate their credit in a year or two. Even though it can be more challenging to get a personal loan after bankruptcy is listed on your credit history, you need to apply for loans from lenders who check credit. No-credit-check loans, such as payday and title loans, often come with unreasonable fees and astronomical annual percentage rates (APR).
When seeking a new personal loan, ensure that you use legitimate lenders and that your estimated APR and any additional fees won’t hinder your ability to eventually become financially secure and debt free.
Contact Indiana Bankruptcy Attorneys
Don’t go it alone when filing Chapter 7 or Chapter 13 bankruptcy — contact bankruptcy lawyers who can assist you with the process of addressing personal loans from before and after bankruptcy and protect you from creditor harassment.
Looking for bankruptcy attorneys in Indiana? Call the legal associates at Sawin & Shea, LLC at 317-759-1483, or you can schedule a FREE consultation online.