If you are struggling with overwhelming debt, you may be considering filing for bankruptcy. While bankruptcy can offer a fresh start, it is important to understand how it will affect your debts. One of the biggest questions people have is whether personal loans can be included in bankruptcy. In this article, we will explore the answer to this question and provide some alternatives to bankruptcy for dealing with personal loans.
Personal Loans and Bankruptcy: Can You Include Them?
Yes, you can include personal loans in bankruptcy. Personal loans are considered unsecured debt, which means they are not tied to any collateral like a home or car. This makes them eligible to be discharged in bankruptcy, just like credit card debt and medical bills.
However, it is important to note that not all types of bankruptcy will allow you to discharge personal loans. Chapter 7 bankruptcy will typically grant you a full discharge of your unsecured debts, including personal loans. Chapter 13 bankruptcy, on the other hand, involves creating a repayment plan that lasts three to five years. While you may be able to include personal loans in a Chapter 13 plan, you will still be required to pay back a portion of the debt.
Understanding Bankruptcy Law and Personal Loans
Bankruptcy laws were put in place to help individuals and businesses who are struggling with debt. In order to file for bankruptcy, you must meet certain eligibility requirements and follow specific procedures. When it comes to personal loans, there are a few things to keep in mind.
First, you will need to disclose all of your debts, including personal loans, when filing for bankruptcy. This includes any loans you may have borrowed from family or friends. You will also need to provide documentation to support your claims, such as loan agreements and statements.
Second, if you have taken out a personal loan within 70 to 90 days of filing for bankruptcy, the lender may be able to challenge the discharge of that debt. This is known as a preference claim, and it is designed to prevent people from taking out loans with the intention of filing for bankruptcy shortly afterwards.
The Effects of Bankruptcy on Personal Loans
If you are able to discharge your personal loans in bankruptcy, the lender will no longer be able to collect on the debt. This means they cannot take legal action against you or garnish your wages. However, it is important to note that bankruptcy will have a negative impact on your credit score, which can make it difficult to obtain credit in the future.
Additionally, if you have co-signers on your personal loans, they may still be responsible for repaying the debt. This is because bankruptcy only affects your liability for the debt, not the co-signer’s liability.
Alternatives to Bankruptcy for Personal Loans
While bankruptcy can offer relief from overwhelming debt, it is not always the best option. There are several alternatives to consider when dealing with personal loans, including:
Debt consolidation: This involves combining multiple debts into a single loan with a lower interest rate.
Debt settlement: This involves negotiating with your creditors to settle your debts for less than what you owe.
Credit counseling: This involves working with a nonprofit organization to develop a budget and repayment plan.
Ultimately, the best option will depend on your individual financial situation. It is important to consult with a qualified professional before making any decisions about how to deal with your personal loans.
Dealing with debt can be overwhelming, but there are options available to help you get back on track. Whether you choose to file for bankruptcy or explore alternatives, it is important to understand how personal loans are affected. By taking the time to research your options and seek professional advice, you can make an informed decision about how to move forward.