Can personal loans be included in bankruptcy?

Personal loans from friends, family or employers fall into common categories of debt that can be written off in bankruptcy. A discharge frees individual borrowers from the legal obligation to pay existing debts. Other types of dischargeable debt include credit card charges, collection agency accounts, medical bills, overdue utility bills, refused checks, and civil court costs not considered fraudulent.

Releasable debt also includes trade debts, amounts owed under rental agreements, certain attorneys’ fees, revolving expense accounts, social security and veterans assistance overpayments, and, in rare cases, student loans. However, some types of debt are not dischargeable, including taxes, child support, and alimony.

Key points to remember

  • There are different types of dischargeable debt, as well as different types of bankruptcy.
  • Often, personal loans from friends and family can be canceled.
  • Some debts may go unpaid in bankruptcy, such as student loans and taxes.

Filing bankruptcy

There are two main ways for individuals to file for bankruptcy. One is Chapter 7 bankruptcy, which involves the cancellation of most or all of the debts, depending on the debts deemed dischargeable. It is possible that in a Chapter 7 bankruptcy, also known as a “liquidating bankruptcy”, the trustee in bankruptcy will liquidate or sell the assets of the debtor who files for bankruptcy to repay all or part of his debts to the creditors. .

Some personal property is exempt from liquidation in a Chapter 7 bankruptcy, although there are limits to the value of the exemption. Examples include:

  • Property
  • Motor vehicle
  • Personal property
  • Retirement accounts
  • Health aids
  • Jewelry

Chapter 13 bankruptcy is sometimes referred to as a “reorganization bankruptcy”. In the case of a Chapter 13 filing, a court-mandated repayment plan is put in place. If the plan is executed to the satisfaction of the court, additional debt may be written off or forgiven. Debtor’s assets are not forfeited or sold to raise funds in a Chapter 13 bankruptcy. As of April 1, 2019, debtors cannot owe more than $ 419,275 in unsecured debt or $ 1,257,850 in secured debt for file for Chapter 13 bankruptcy. The bankruptcy code provides for an increase in these limits every three years.

Unsecured debt can be wiped out in a Chapter 7 bankruptcy, but not in a Chapter 13 bankruptcy.

Differences between types of bankruptcy

Chapter 7 bankruptcy differs from Chapter 13 bankruptcy in important ways. More specifically, in a Chapter 13 bankruptcy, the debtor retains his property with the understanding that he is required to repay all or part of the debts over a period of three to five years. Chapter 13 bankruptcy allows the debtor to retain assets and recover from bankruptcy quickly, provided the debtor is able to meet the eligibility requirements, such as earning sufficient income to repay the debt in a timely manner. .

Chapter 7 bankruptcy can be more devastating for a debtor with a large asset base, but it is a preferable option if the debtor’s asset base is small and the amount of debt is seemingly insurmountable. It can enable debtors to pay off a large amount of debt very quickly. Chapter 7 bankruptcy is generally reserved for low-income people who cannot repay some of their debts.

With a Chapter 7 bankruptcy filing, unsecured debts are wiped out once the court approves the filing. This process can take several months. With a Chapter 13 bankruptcy filing, unsecured debts are not cleared. Instead, payments must be made according to a court-mandated plan. Once you reach the end of the plan and all payments have been made, any remaining debt is cleared.

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