In today’s economic climate, where inflation, medical costs, and living expenses continue to climb, more Americans are turning to personal loans to bridge financial gaps. But when debts become unmanageable, bankruptcy may appear as the only viable exit. For those burdened by personal loans, it’s crucial to understand how these debts are treated in bankruptcy filings.
Personal loans are typically unsecured, meaning they aren’t backed by assets like your car or home. That classification often makes them eligible for discharge under bankruptcy laws. However, the type of bankruptcy filed—Chapter 7 or Chapter 13—significantly influences the outcome. The following guide walks you through the options and limitations involved when dealing with personal loan debt through bankruptcy in 2025, ensuring you’re informed, protected, and ready to make the best financial decision.
What Is Bankruptcy and When Does It Apply?
Bankruptcy is a federally sanctioned legal process designed to help individuals and businesses eliminate or repay debts under the protection of the bankruptcy court. It can provide immediate relief from collection efforts, foreclosure, wage garnishment, and creditor lawsuits through what is known as an “automatic stay.”
For individuals, the two most common forms are Chapter 7 and Chapter 13. Chapter 7 focuses on liquidating non-exempt assets to pay off creditors and then discharging most remaining debts. Chapter 13, on the other hand, restructures debts into a court-approved repayment plan based on your income and allows you to retain your assets while paying off some or all of your obligations over a period of three to five years.
Bankruptcy is usually considered a last resort after alternatives like debt consolidation, credit counseling, or settlement negotiations have failed. However, it remains a powerful legal option for a fresh financial start, especially when personal loans and other unsecured debts spiral out of control.
How Personal Loans Are Treated in Bankruptcy
Are Personal Loans Dischargeable?
Most personal loans are dischargeable in bankruptcy, particularly under Chapter 7. These include personal loans obtained through traditional banks, credit unions, online lenders, payday loan companies, and even informal agreements with friends, family, or employers. Since they lack collateral, these loans fall under the category of unsecured debts and are typically among the first to be eliminated in a discharge.
In Chapter 13 bankruptcy, while the loans may not be discharged immediately, they are rolled into your repayment plan. Once you complete the plan—which usually spans 36 to 60 months—any remaining qualifying personal loan balances can be discharged at the end of the term.
It’s important to note that misrepresenting your ability to repay a loan at the time of borrowing can result in the loan being declared non-dischargeable by the court due to fraud. Therefore, transparency and accurate documentation are essential when considering bankruptcy.
Examples of Dischargeable Unsecured Debts
Alongside personal loans, several other forms of unsecured debts can be discharged in bankruptcy. These include credit card balances, which often carry high interest rates and fees; unpaid medical bills that can accumulate rapidly in the absence of sufficient health insurance; utility arrears like past-due electricity and water bills; and even unpaid rent in some cases. Certain civil judgments, excluding those arising from fraud or willful misconduct, can also be discharged.
In essence, unsecured debts lack any claim to your physical property, unlike mortgages or auto loans, which are secured by the underlying asset. This makes them easier to discharge during bankruptcy proceedings, provided they meet eligibility criteria and do not fall under any specific legal exceptions.
Chapter 7 Bankruptcy: A Fresh Start (But at a Cost)
Key Features
Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” offers one of the fastest routes to debt relief, making it a preferred option for those with limited income and overwhelming debt. The process typically lasts three to six months and results in the discharge of most unsecured debts, including personal loans. Once approved, debtors are no longer legally required to repay these obligations.
However, the trade-off is the potential loss of non-exempt assets. A court-appointed trustee reviews your finances and may liquidate certain property to repay creditors. That said, many essential assets are protected under bankruptcy exemption laws, which are updated regularly.
Property Exemptions in 2025
As of 2025, federal and state-specific exemptions continue to protect assets deemed essential for everyday living. These exemptions often cover a portion of equity in your primary residence (homestead exemption), a single motor vehicle, necessary clothing, household furnishings, work tools, and qualified retirement accounts like 401(k)s and individual retirement accounts (IRAs). Health aids and public benefits such as Social Security or veterans’ benefits are also typically exempt.
Choosing between federal and state exemption systems (where allowed) can greatly impact what you retain, so professional legal guidance is essential to maximize asset protection during a Chapter 7 filing.
Chapter 13 Bankruptcy: Structured Repayment and Debt Forgiveness
Key Features
Chapter 13 bankruptcy is often the route chosen by those with regular income who wish to retain their assets and avoid liquidation. Instead of wiping out debts immediately, this form of bankruptcy involves proposing a repayment plan to the court, typically lasting three to five years, during which you repay a portion of your debts based on your disposable income.
The plan must be approved by the court and adhered to strictly. Once completed, any remaining unsecured debt—such as unpaid personal loans—can be discharged. Chapter 13 also allows you to catch up on missed mortgage or car loan payments, potentially halting foreclosures or repossessions in progress.
How It Works
To qualify for Chapter 13 as of 2025, your combined secured and unsecured debts must not exceed $2,750,000. Once eligible, you’ll work with a bankruptcy attorney to propose a repayment plan that reflects your income, essential living expenses, and the types of debt you owe. The court evaluates the plan’s feasibility and fairness before granting approval.
During the repayment period, you are protected from creditor actions, and your assets remain intact. Completing the plan successfully results in a court order discharging any remaining dischargeable debts, giving you a fresh start while preserving what you own.
Which Debts Cannot Be Discharged in Bankruptcy?
While personal loans are usually dischargeable, there are key categories of debt that bankruptcy law deems non-dischargeable. These include child support and alimony, which are considered priority debts and must be paid in full. Most student loans are also non-dischargeable unless the borrower can prove “undue hardship” through a separate legal process, which remains difficult to meet despite recent legislative discussions.
Tax debts are another category that may not be forgiven, particularly recent income taxes, property taxes, and tax penalties. Court-imposed fines, criminal restitution, and debts arising from personal injury cases involving driving under the influence (DUI) are also excluded. Additionally, debts involving fraud, embezzlement, or intentional misrepresentation are likely to be challenged and excluded from discharge.
Understanding which debts are dischargeable is critical before filing. A comprehensive review with a bankruptcy professional can help identify potential red flags and avoid surprises during court proceedings.
Can You Get a New Personal Loan After Bankruptcy?
Securing new credit after bankruptcy is possible, but it comes with challenges. Initially, lenders may view you as a high-risk borrower, resulting in higher interest rates and stricter terms. However, the financial landscape in 2025 has seen a rise in lenders offering post-bankruptcy products designed to help consumers rebuild credit.
Personal loans are available to bankruptcy survivors, particularly if you can demonstrate a stable income, a manageable debt-to-income ratio, and a commitment to timely repayment. You may be required to provide a co-signer, put up collateral, or start with a smaller loan amount. Over time, responsible credit behavior can improve your credit profile and allow access to better lending terms.
Secured credit cards, credit-builder loans, and becoming an authorized user on a trusted person’s credit account are all additional strategies to enhance your post-bankruptcy financial standing.
Important Tips Before Filing for Bankruptcy
Before pursuing bankruptcy, it’s essential to consider all alternatives. Credit counseling agencies approved by the U.S. Department of Justice can offer personalized advice, budget planning, and even help negotiate with creditors. In fact, completing a credit counseling session is a mandatory step before filing.
Avoid incurring new debts immediately prior to filing, as courts scrutinize recent financial behavior for signs of fraud or abuse. Transparency is key—you must disclose all assets, income, debts, and recent financial transactions to avoid dismissal or penalties.
Gather documentation such as loan agreements, bank statements, tax returns, and pay stubs. Working with a qualified bankruptcy attorney can ensure your case is filed correctly, exemptions are maximized, and you avoid missteps that could prolong or derail your discharge.
Final Thoughts: Is Bankruptcy the Right Path for You?
Filing for bankruptcy is not a decision to be taken lightly, but it can offer a meaningful path forward for those overwhelmed by personal loan and other unsecured debt. It allows for the restructuring or elimination of burdensome obligations, protection from aggressive creditors, and the chance to rebuild your financial life.
Chapter 7 may offer fast relief but at the cost of losing some assets. Chapter 13 provides more flexibility and asset protection but requires consistent income and commitment to a multi-year repayment plan. Ultimately, your choice will depend on your financial circumstances, long-term goals, and eligibility under current laws.
Consulting with a financial advisor or bankruptcy attorney can help clarify your options, assess risks, and decide whether bankruptcy is the right solution. With informed planning and legal guidance, it’s possible to overcome personal loan debt and emerge with a stronger, more stable financial future.
Frequently Asked Questions (FAQ)
Can personal loans be discharged in bankruptcy in 2025?
Yes, most personal loans can be discharged in bankruptcy as long as they are unsecured and not tied to fraudulent behavior. In a Chapter 7 filing, these loans are typically eliminated after the liquidation of non-exempt assets. Under Chapter 13, personal loans are included in a court-approved repayment plan, and any remaining balance may be discharged after successful plan completion. However, if the loan was obtained through misrepresentation or fraud, the court may deem it non-dischargeable.
What’s the difference between Chapter 7 and Chapter 13 bankruptcy for personal loans?
Chapter 7 bankruptcy provides a faster route to discharging unsecured debts like personal loans, usually within a few months. However, it may require the liquidation of non-exempt assets. Chapter 13 bankruptcy, by contrast, allows you to keep your property by following a three-to-five-year repayment plan based on your income. After the plan ends, any qualifying personal loan balances that remain can be forgiven. The choice between the two depends on your income, assets, and financial goals.
Are payday loans included in bankruptcy discharge?
Yes, payday loans are generally considered unsecured debts and are eligible for discharge in both Chapter 7 and Chapter 13 bankruptcy filings. However, the timing and intent behind the loan may come under scrutiny. If the loan was taken out shortly before filing bankruptcy, creditors may challenge its discharge, arguing that it was done in bad faith. Transparency and accurate disclosure of financial conditions are crucial for a successful discharge.
Which debts cannot be discharged in bankruptcy in 2025?
Certain debts remain non-dischargeable under U.S. bankruptcy law in 2025. These include child support, alimony, most student loans (unless undue hardship is proven), recent tax debts, court fines, DUI-related injury claims, and debts resulting from fraud or intentional misconduct. Unlike personal loans, these obligations typically survive bankruptcy and must be repaid in full, regardless of the chapter filed.
Can you apply for a new personal loan after bankruptcy?
You can apply for a new personal loan after completing bankruptcy, but expect higher interest rates and stricter lending criteria. Lenders in 2025 are increasingly offering specialized financial products for individuals with bankruptcy histories. Demonstrating stable income, a low debt-to-income ratio, and responsible credit behavior—such as using secured credit cards or credit-builder loans—can improve your chances of approval and better terms over time.
Do you lose all your property if you file for Chapter 7 bankruptcy?
No, filing for Chapter 7 doesn’t mean losing everything. Bankruptcy exemption laws—both federal and state—protect many essential assets from liquidation. In 2025, these typically include equity in your primary home, a vehicle, necessary household goods, clothing, work tools, retirement accounts, and public benefits like Social Security. Choosing the right exemption system with the help of an attorney can help you retain as much property as legally possible.
How long does bankruptcy stay on your credit report in 2025?
As of 2025, a Chapter 7 bankruptcy remains on your credit report for 10 years from the filing date, while Chapter 13 remains for 7 years. Although the bankruptcy itself impacts your credit, you can begin rebuilding credit almost immediately by using financial tools like secured credit cards, credit-builder loans, or becoming an authorized user on another account. Responsible financial behavior can significantly improve your score over time, even before the bankruptcy drops off your report.
What should I do before filing for bankruptcy due to personal loan debt?
Before filing, you should explore alternatives like debt consolidation, credit counseling, or loan settlement. If bankruptcy remains the best option, gather key financial documents—such as tax returns, pay stubs, loan agreements, and asset lists—and consult a licensed bankruptcy attorney. Also, you must complete a government-approved credit counseling session as part of the bankruptcy process. Avoid taking on new debts or transferring assets, as this can raise legal concerns and affect your eligibility for discharge.
Can I keep my car or home in bankruptcy?
In many cases, yes. Under Chapter 13, you can catch up on missed payments through a repayment plan and retain secured assets like your home or car. Under Chapter 7, whether you keep these assets depends on their value and the applicable exemption laws in your state. If the asset is fully protected under exemption rules and you’re current on payments, you may be able to keep it. Otherwise, the court may require its sale to repay creditors.
Will filing for bankruptcy stop debt collectors from contacting me?
Yes, filing for bankruptcy triggers an “automatic stay,” a legal protection that stops most collection activities immediately. This includes wage garnishments, foreclosure proceedings, lawsuits, and creditor phone calls. The automatic stay remains in effect throughout the bankruptcy process, offering significant relief from aggressive debt collection tactics. However, this stay may not apply to certain obligations like child support or criminal fines.
Featured image credit: Melinda Gimpel (Unsplash)
