Short answer: filing for bankruptcy automatically stops most collection on your loans (U.S. Courts). In Chapter 7, a discharge releases you from personal liability for most debts, which can include an unsecured personal loan; in Chapter 13 you repay all or part of your debts through a plan over three to five years (U.S. Courts, U.S. Courts). A secured loan is different: the lender may keep rights to the property, such as a car. A bankruptcy can stay on credit reports for up to 10 years (15 U.S.C. 1681c(a)(1)). Bankruptcy has serious, lasting effects; talk to a bankruptcy attorney or legal aid before you file.
Before you can file
An individual generally cannot file under any chapter unless they received credit counseling from an approved agency within 180 days before filing, with limited exceptions (U.S. Courts, 11 U.S.C. 109(h)). A discharge can also be denied for failing to complete an approved course in financial management (U.S. Courts). The U.S. Courts also note that out-of-court agreements with creditors or debt counseling may be an alternative to bankruptcy (U.S. Courts).
The automatic stay
Filing a petition automatically stops most collection actions against you or your property. While the stay is in effect, creditors generally may not start or continue lawsuits, wage garnishments, or even phone calls demanding payment. Some actions are not stayed, and in some situations the stay may last only a short time (U.S. Courts, 11 U.S.C. 362).
Chapter 7 vs Chapter 13
| Chapter 7 | Chapter 13 | |
|---|---|---|
| How it works | A trustee gathers and sells nonexempt assets to pay creditors; there is no repayment plan (U.S. Courts) | You propose a plan to pay creditors in installments over three to five years, paid to a trustee (U.S. Courts) |
| Who can use it | A means test checks whether a filing is presumed abusive, based on income and allowed expenses (U.S. Courts) | Individuals with regular income, within debt limits set by law (U.S. Courts) |
| Unsecured personal loan | A discharge releases you from personal liability for most debts, with many exceptions (U.S. Courts) | Repaid in whole or in part through the plan (U.S. Courts) |
| Secured loan, such as a car loan | The lender may keep rights to seize the property even after a discharge; to keep it, you may reaffirm the debt (U.S. Courts) | You may be able to reschedule secured debts, other than a mortgage on your main home, over the plan, which may lower the payments (U.S. Courts) |
| Cosigners | The rule at right is a Chapter 13 provision; ask an attorney how a Chapter 7 case affects anyone who cosigned | Unless the court allows it, a creditor may not collect a consumer debt from someone liable with you during the case (U.S. Courts, 11 U.S.C. 1301) |
Which property you can keep depends on exemptions, which vary by state; this guide does not cover them. Ask a bankruptcy attorney about the rules where you live.
Reaffirming a secured loan
- A reaffirmation is an agreement that you stay liable for the debt even though it would otherwise be discharged; in return the lender agrees not to take the property while you keep paying (U.S. Courts).
- It must be made before the discharge, in writing, and filed with the court (11 U.S.C. 524(c)). If you did not have a lawyer for it, the judge must approve it (U.S. Courts).
- You can cancel it before the discharge or within 60 days after it is filed with the court, whichever is later, by notifying the lender (11 U.S.C. 524(c)(4)).
- Reaffirming means your personal liability for that debt is not discharged (U.S. Courts), so reaffirm only a debt you can keep paying.
Your credit afterwards
A bankruptcy case can be reported for 10 years from the date of the order for relief (15 U.S.C. 1681c(a)(1)). After a discharge, check how each discharged loan is reported, and dispute anything wrong (disputing a loan reporting error). A cosigner's own report is a separate matter; see cosigning a loan.
Other ways to deal with debt you cannot pay are in what happens if you miss a payment and debt collector rights. This guide explains federal law in general terms and is not legal advice.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.