Can You File Bankruptcy On Personal Loans?

If the answer is told then it should be ‘yes’ but with some conditions. To file bankruptcy on personal loans is such a complex matter that it needs to be understood deeply. It does not only depend on your condition to show bankruptcy but it includes various legal conditions and circumstances on which the decision about your bankruptcy can be taken. 

There are different types of bankruptcies which are explained further into chapters in the US Bankruptcy Code. Each chapter explains deeply about the nature of bankruptcy. So before learning about bankruptcy, we should consider some other things along with it.

Define Personal Loan

Personal loans can be defined as a common financial tool which helps any individual in hard times. Personal loans differ from other types of loans which include secured, unsecured, and co-signer loans, each comes with its own characteristics. Secured personal loans come under the condition of being backed by collateral such as a vehicle or property. Unsecured loans do not seek any collateral but come with high interest. A co-signer personal loan requires a third person who has good creditworthiness and will be equally responsible in case of non-payment.

Personal loans are taken to meet different needs such as home improvement, weddings, vacations and debt consolidation. Without any doubt, these loans are very helpful in difficult financial times, but the proper use makes them more valuable.

Can you file bankruptcy on personal loans

Definition of Bankruptcy Chapter 7 And Chapter 13

There are two main ways to seek to file for bankruptcy. One is Chapter 7 and the other is Chapter 13. Any individual can file a petition for bankruptcy to get relief from the debt but the decision is taken on the basis of the condition, type of debt, and other aspects by the Federal Courts under rules drafted in the U.S. Bankruptcy Code.


Bankruptcy is a state of being without money and in this state, any individual is unable to pay money to a lender, bank, or any third person, from whom he has taken earlier. Bankruptcy in the U.S. helps individuals to pay their debts by liquidation of assets or by making repayment plans. For this Chapter 7 and Chapter 13 explain the process deeply. 

Chapter 7 Bankruptcy

In Chapter 7 Bankruptcy, The debtor files a petition for bankruptcy, which he thinks is discharging from his debts. Chapter 7 involves cancelling most debts, but it is essential to consider which debt should be discharged. Chapter 7 is also called ‘liquidation bankruptcy’ in which a case trustee is allowed to sell the debtor’s non-exempt property or assets and pay it to the creditor. 

Remaining unsecured debts such as personal loans are discharged from paying and the debtor is no longer committed to repaying debt legally. 

It should be noted that there are several other options through which Chapter 7 can be ignored. Debtors engaged in the business field can avoid liquidation of assets by avoiding Chapter 7 and instead, they should opt for Chapter 11 in which they can settle and adjust their debt. In Chapter 13 they also can get relief from paying debt at once.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is also referred to as ‘reorganisation bankruptcy’. When any individual files for Chapter 13 bankruptcy, his assets are not confiscated and no liquidation bankruptcy needs to be done. Chapter 13 bankruptcy under the rules drafted in the U.S. Bankruptcy Code allows debtors to adjust their debts with regular income. It also allows them not to lose their property or assets and to pay debts in regular payments for three to five years. 

In Chapter 13 personal loans can be managed through repayment plans and this allows them to make regular payments over time even with less interest. Once the payments are done, other unsecured personal loans might be discharged.

How Can You Avoid Bankruptcy

To avoid bankruptcy, your priority should be to achieve your financial goals. No doubt, bankruptcy might get you relief, but it comes with some severe consequences. Here are some key points to note to avoid bankruptcy.

Make A Proper Budget: 

Make a proper budget which covers monthly income, expenses and other costs. This will help you to understand every aspect of your financial condition. Once you are able to implement it into your life, no financial ups and downs will happen.

Say No To Unnecessary Expenses

Overspending should be stopped and money should be spent on necessary items. These wrong financial habits lead you to financial uncertainties. Wise spending and the right decisions can settle your future financial problems.

Prioritise Debt Repayments

Do not waste your money on overspending, use this money to pay your debt payments. If you have multiple debts then you may consider debt consolidation, you can combine these multiple debts into one debt where you can low interest. Having more than one loan may also have some bad effects on your creditworthiness.

Save Emergency Funds

Save emergency funds. Saving funds for an unexpected time can help you to tackle them. Additionally, when you keep funds for rainy days you will not need to take any kind of debt. These funds help you without paying any interest.

Take Expert Advice

Whenever you seem to face situations like debt, consult your financial expert and seek legal advice. Do not select the wrong ways to avoid debt but the best pieces of advice given by experts should be followed.

How To Get a Personal Loan After Bankruptcy

Getting a personal loan after filing for bankruptcy might be a little challenging but the impossible is nothing. You need to be patient and try to improve yourself. After following some tips mentioned below, you might be able to get a personal loan again.

Rebuild Credit

After filing for bankruptcy, it should be your priority to rebuild your credit. Pay your bills on time. Do not hold any payment due. Try to obtain a secured credit card or credit builder loan which can help you to improve your credit. Pay your payments on time.

Analysis of Your Credit Report Regularly

Check regularly about your account to ensure that it gets discharged in your bankruptcy and should be marked as ‘Discharged’. This should be checked regularly. If you find any inaccuracy, raise it with the credit bureau.

Increase Your Income

Everything is possible when you have a stable income. By increasing income, your due payments can be paid easily and credit building can be easy. To be financially strong, you need to increase your income. You should explore some opportunities for extra work like freelancing or doing a part-time job. 

Search For Co-Signer

Your relative or spouse might help you to get a personal loan. Your co-signer has good credit and it can ease your chance of getting a personal loan. In case of defaulting, your co-signer will be payable the amount.

Provide Collateral 

The collateral can help you to get a secured personal loan. You can offer a valuable asset or property through which the lender ensures the guarantee of getting back the payment and you can redeem your asset after paying the payments.

Frequently Asked Questions

Where To Apply For Bankruptcy?

You can apply for bankruptcy in the federal courts in the U.S. where you are living. You need the necessary documents to file for bankruptcy.  You must provide the court with whatever is asked to submit. This can be the information on your assets, income, expenditures etc.

How Does Bankruptcy Affect My Credit Score?

Bankruptcy can damage your credit score in many ways. It can drop your credit score significantly. Obtaining new debt can be challenging and high interest can be charged. With a low credit score, further benefits can not be taken.

What Loans Can Not Be Discharged In Bankruptcy?

There are some categories of debts which come under the dischargeable debts. Some types of tax, student loans, child support and alimony, government units etc are not under chargeable in bankruptcy.


Owing a personal loan and filing for bankruptcy can get you rid of a loan for a time but it is a time to make a fresh start again. So you need to regain your credibility, working hard to earn money and spend it strategically that can lead you to a better financial future. It is also essential to understand the decision to file for bankruptcy carefully.

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