While bankruptcy filings are designed to give borrowers and their finances a clean slate, not all debts are the same. Some are more easily discharged than others, so it’s fair to ask, ‘Can you file bankruptcy on personal loans?’

The short answer: You should be able to obtain bankruptcy relief on your personal loans, but it will depend on several factors, mainly the type of personal loan you hold and the type of bankruptcy protection you are seeking.

It’s also important to know that in a bankruptcy filing, not all debts are released at the same time.

Some might be discharged at the start of the bankruptcy proceedings while others might not be released until later. So even if you can file bankruptcy on personal loans, you might have to wait a while before experiencing relief.

Types of bankruptcy protection

There are different types of bankruptcy filings, but they mostly fall into one of two categories: Chapter 7 or Chapter 13.

Chapter 7: A Chapter 7 bankruptcy is also known as a liquidation event because it requires that the debtor sell off some of their assets in order to repay their debts.

A Chapter 7 filing is generally reserved for people who don’t own major assets, like a house, that they could lose in the bankruptcy proceedings.

Chapter 13: A Chapter 13 bankruptcy filing is more of a reorganization. This type of filing allows the debtor to hold onto their assets, including their house and a vehicle.

This treatment is only possible if the filer completes a repayment plan outlined by the court that can take anywhere from three to five years to finish.

The duration of the repayment plan under a Chapter 13 bankruptcy depends on several factors, including the debtor’s disposable income, their bills, and the total amount owed.

Types of personal loans

In general, the answer to the question is yespersonal loans can be included in bankruptcy. They do not share the same fate as student loans or taxes, which are not usually eligible for forgiveness in a bankruptcy filing.

The type of personal loan you have, and the type of bankruptcy you file also affects the outcome.

Personal loans are just thatpersonal. They can be used for a variety of purposes, such as home improvements, car repairs, vacations, weddings, etc.

Depending on your situation, it’s possible that you obtained a personal loan from a financial institution, an online lender, a friend, or family members.

Usually, borrowers make monthly payments toward principal plus interest. These types of personal loans should meet the criteria to be discharged in a bankruptcy filing.

Whether you have obtained a secured or unsecured personal loan will influence the way the courts treat the debt in bankruptcy proceedings.

A personal loan of the secured variety is backed by some asset, such as a home, vehicle, piece of machinery, etc. If the borrower defaults on the loan, the lender can repossess the asset that secured the loan and use the proceeds toward recouping their loss.

An unsecured personal loan isn’t backed by any personal property.

In a Chapter 7 bankruptcy filing, you should find that the courts allow unsecured loans to be discharged. So in this case, you can file bankruptcy on personal loans as long as they are unsecured.

It’s also possible to convert a secured loan into an unsecured loan under Chapter 7, yet another way to deal with personal loans and bankruptcies. The way to do this is by surrendering the collateral used to secure the personal loan.

The reason you might want to do this is that in Chapter 7 bankruptcy proceedings, it is easier to get an unsecured personal loan discharged than a secured loan.

Given that a Chapter 13 filing is a reorganization of debt, a personal loan is repaid to the lender, whether it is secured or unsecured.

But the loan doesn’t have to be repaid in one lump sum. Generally payments are spread over a repayment plan that can last for several years.

Things to consider

Now that you know that bankruptcy can cover personal loans, you might want to be prepared for some of the repercussions.

A bankruptcy filing will likely drag your FICO credit score down.

Even if you maintained a good credit score before filing, a bankruptcy could take a 700 FICO score down to 500 or lower.

The bankruptcy filing will remain on your credit report for up to a decade after you file. But a Chapter 13 filing could disappear sooner if you adhere to the court’s payment plan.

Bankruptcy and the future

If you’ve got just one personal loan for a relatively small amount, it might not be worth filing for bankruptcy protection when you consider the expenses involved, e.g., attorney fees.

But, if you’ve got personal loans in addition to other debts, including credit cards, auto loans, medical bills, etc., then it could be worth your while to go that route.

If you decide to file for bankruptcy on personal loans, there’s nothing to be ashamed of. Bankruptcy is meant to serve as a lifeline to borrowers who need a second chance.

By establishing good habits and rebuilding your credit, you could find that filing for bankruptcy on personal loans was the best decision you could have made.