Personal loans can be included in bankruptcy, and in most cases they are wiped out completely. Federal bankruptcy law treats personal loans as general unsecured debt because they usually have no collateral behind them, which puts them in the category most likely to be discharged at the end of a case. Whether you file Chapter 7 or Chapter 13 changes how much you pay first, but the end result for the loan balance is generally the same: it goes away. A few situations, mostly involving dishonesty or last-minute spending, can block that outcome.
Personal Loans in Chapter 7
Chapter 7 is the liquidation form of bankruptcy. A trustee reviews your assets, sells anything not protected by an exemption, and distributes the proceeds to creditors in a priority order set by federal law. General unsecured debts like personal loans sit near the bottom of that order.1Office of the Law Revision Counsel. 11 USC 507 – Priorities Most Chapter 7 filings are “no-asset” cases, meaning the trustee finds nothing to sell and personal loan lenders receive nothing at all.
The discharge itself typically arrives about four months after you file.2United States Courts. Discharge in Bankruptcy – Bankruptcy Basics Once the court signs the discharge order, it acts as a permanent injunction: the lender cannot sue you, contact you, or try to collect the balance, and the same protection follows the debt if it has already been sold to a collection agency.3Office of the Law Revision Counsel. 11 U.S. Code 524 – Effect of Discharge
Because a personal loan is unsecured, the lender has nothing to repossess. You are not choosing between keeping the loan or losing property that secures it. The lender simply loses the right to collect.
Personal Loans in Chapter 13
Chapter 13 is a repayment bankruptcy. You propose a plan that runs three to five years, and you pay creditors from your disposable income during that period. Three years applies if your income is below the state median; up to five years applies if it is above.4United States Courts. Chapter 13 – Bankruptcy Basics
Personal loans are grouped with your other general unsecured debts in the plan. They typically receive only a fraction of the original balance, because priority debts and secured debts get paid first and unsecured creditors split whatever disposable income remains. When you complete the plan, the remaining personal loan balance is discharged.4United States Courts. Chapter 13 – Bankruptcy Basics
When a Personal Loan Survives Bankruptcy
Federal law carves out specific exceptions where a personal loan is not dischargeable. The exceptions generally involve fraud or last-minute spending on the eve of filing:
- Fraud on the loan application. If you gave the lender false financial information to get approved, the lender can argue the loan was obtained by fraud.
- Luxury goods or services totaling more than $900 from a single creditor within 90 days before filing. These charges are presumed non-dischargeable.5Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge
- Cash advances totaling more than $1,250 within 70 days before filing. These are also presumed non-dischargeable.5Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge
The luxury and cash advance rules are rebuttable presumptions, so you can present evidence that the spending was legitimate or that you intended to repay when you incurred the debt. The burden of proof shifts to you.
A creditor who wants to block discharge on any of these grounds has to file an adversary proceeding within 60 days of the first meeting of creditors. Miss that window, and the debt is discharged regardless of what the lender might have argued.2United States Courts. Discharge in Bankruptcy – Bankruptcy Basics
Immediate Relief When You File
The moment your petition hits the court, a federal order called the automatic stay stops the collection machinery. Lawsuits pause. Wage garnishments stop. Collection calls have to end.6Office of the Law Revision Counsel. 11 U.S. Code 362 – Automatic Stay The stay covers your personal loan lenders along with every other creditor holding a debt from before your filing date, and it stays in place until the case ends, the debt is discharged, or the court lifts it for a particular creditor.
If Someone Co-Signed the Loan
Your bankruptcy protects you. It does not protect anyone who co-signed. A co-signer remains fully liable for the balance the lender does not collect from you or through your case.
In Chapter 7, the lender can pursue the co-signer as soon as the automatic stay stops applying to that creditor’s claim. Chapter 13 offers more protection through a co-debtor stay that halts collection against co-signers during the plan. A creditor can ask the court to lift that stay if the co-signer actually received the loan money, if the plan does not propose to pay the claim, or if the creditor would suffer irreparable harm without relief.7Office of the Law Revision Counsel. 11 U.S. Code 1301 – Stay of Action Against Codebtor If your Chapter 13 plan pays the loan in full, the co-signer walks away clean. If it pays only part of the balance, the co-signer owes the rest when your case closes.
Loans From Family
A loan from a parent, sibling, or other relative counts as a personal loan and belongs on your bankruptcy schedules. Two things trip people up here.
First, if you paid back the relative in the year before filing, the trustee can reverse that payment as a preferential transfer. Ordinary creditors have a 90-day lookback; insiders, including family, have a full year. The trustee recovers the money and redistributes it among all creditors, so a repayment to a parent made months before filing can end up clawed back.
Second, you have to list the debt. Leaving a relative off your schedules to spare them does not shield anyone. It creates the appearance that you are hiding a creditor or giving one favorable treatment, and that can put your entire discharge at risk.
What You Have to Do for the Discharge to Hold
Two administrative pieces can undo everything if you skip them.
Every personal loan has to appear on Schedule E/F, the form listing your unsecured creditors.8U.S. Courts. Schedule E/F: Creditors Who Have Unsecured Claims (Individuals) Bank loans, online lender balances, payday loans, and money borrowed from friends or family all belong there. If you leave one off and discover it later, you can amend the schedules, but the court charges $34 to add a creditor, and a missed creditor can delay your case.
Every individual filer also has to complete two courses through a provider approved by the U.S. Trustee Program: a credit counseling session before filing and a debtor education course before the discharge is granted.9United States Courts. Credit Counseling and Debtor Education Courses Skipping either one can result in the court denying your discharge entirely, which means you go through the bankruptcy process and your personal loans survive it.10United States Courses. Discharge in Bankruptcy – Bankruptcy Basics Each course usually costs $10 to $50, with reduced rates or waivers available for filers whose household income is below 150 percent of the federal poverty level.11U.S. Trustee Program/Dept. of Justice. Frequently Asked Questions (FAQs) – Credit Counseling
What Bankruptcy Does to Your Credit
A bankruptcy filing appears on your credit report for up to 10 years from the filing date, whether you filed Chapter 7 or Chapter 13.12Consumer Financial Protection Bureau. How Long Does a Bankruptcy Appear on Credit Reports? The immediate score impact depends on where you started. Filers coming in with good-to-excellent credit often see a drop of around 200 points; filers who already had fair or poor credit typically see a smaller decline of 130 to 150 points. Rebuilding starts once the discharge is granted, and many people see meaningful improvement within one to two years by using secured credit cards and keeping every payment on time.