For individuals struggling with overwhelming debt, bankruptcy may offer a path to financial relief. But when it comes to personal loans, not all debts are treated equally in bankruptcy proceedings. Understanding the difference between secured and unsecured personal loans is key to determining what can be discharged and what might remain after filing for bankruptcy.
Unsecured Personal Loans: What Happens in Chapter 7?
Unsecured personal loans are not backed by any collateral. In a Chapter 7 bankruptcy, these types of loans are typically dischargeable, meaning they can be completely eliminated. Here are common examples of unsecured personal loans that may be wiped out:
- Bank loans without collateral
- Payday loans
- Signature loans from lending companies
- Personal loans from friends or family members
No matter the status of the loan—whether it’s current, overdue, or in collections—it remains dischargeable under Chapter 7 bankruptcy. Even if legal action has been taken, such as a lawsuit or wage garnishment, the loan can still be eliminated, offering much-needed financial relief.
Beware of Dishonest Debt Collectors
One thing to watch out for after bankruptcy is dishonest debt buyers. After a debt is discharged, it is possible for a shady creditor to sell your discharged debt to a third party. They may attempt to collect the debt by claiming they weren’t listed in your bankruptcy. Don’t be fooled—once your debt is discharged, no one has the legal right to collect it.
Secured Personal Loans: What You Need to Know
Secured personal loans, on the other hand, are backed by collateral, such as a car or home. While your obligation to repay the debt can be discharged in bankruptcy, the lender still has the right to repossess or foreclose on the collateral unless you continue making payments. Here are some examples of secured loans:
- Auto loans with the vehicle as collateral
- Home mortgage loans
- Title loans backed by a car
- Loans secured by personal property, like jewelry or boats
If you wish to keep the collateral, you’ll need to continue paying for it, even after your personal liability for the loan has been discharged. If keeping the property isn’t a priority, surrendering it can help you eliminate a significant portion of debt.
What About Chapter 13?
For individuals who may not qualify for Chapter 7, Chapter 13 bankruptcy offers another path to manage personal loans. In Chapter 13, unsecured personal loans can be handled in several ways depending on your income and debt situation:
- Some borrowers pay back 100% of their unsecured loans over time.
- Others may pay only a portion of the loan, with the remainder discharged once the repayment plan is completed.
- In certain cases, none of the unsecured debt is repaid, and the loan is fully discharged after the bankruptcy plan.
Secured personal loans in Chapter 13 follow similar rules as in Chapter 7: you either make payments to keep the property or surrender it. However, Chapter 13 offers more flexibility, allowing borrowers to catch up on missed payments over a three to five-year period. In some instances, you may even pay less than the outstanding balance on the loan while still retaining the collateral.
Which Bankruptcy Option is Right for You?
The decision to file for bankruptcy—and which chapter to file under—depends on a variety of factors, including your income, assets, and types of debt. Unsecured personal loans are generally dischargeable, but if you have secured loans, you’ll need to consider whether you want to keep the collateral or not.
For guidance on which bankruptcy option is best for your situation, it’s important to consult with an experienced bankruptcy attorney. At Law Offices of Terrence Fantauzzi, we’re here to help you navigate the complexities of bankruptcy and find the solution that works best for you. Contact us at (909) 552-1238 to schedule a consultation today.