Can Personal Loans Be Included in Bankruptcy? What To Know

Yes, personal loans can generally be discharged in bankruptcy. Most personal loans are unsecured debt, similar to a credit card balance, which puts them squarely among the debts that both Chapter 7 and Chapter 13 bankruptcy are designed to eliminate.

There are exceptions worth knowing, particularly around fraud and recently taken-out loans, and secured personal loans work a bit differently.

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Key Takeaways

• Most personal loans are dischargeable. As unsecured debt, personal loans are treated the same way as credit card balances and medical bills in both Chapter 7 and Chapter 13 bankruptcy.

• Fraud is the main exception, and it works differently than you might think for personal loans. The well-known "recent luxury purchase" and "cash advance" fraud presumption under 11 U.S.C. Section 523(a)(2)(C) specifically applies to credit cards, not typical closed-end personal loans. A personal loan can still be challenged under the general fraud standard, but the creditor bears a higher burden of proof without that presumption's help.

• Secured personal loans are different. If your loan is backed by collateral, like a vehicle or home fixtures, discharge eliminates your personal obligation to pay, but the lender's lien on that property generally survives.

• A co-signer stays on the hook. Discharging a personal loan removes your liability, but your co-signer remains legally responsible for the debt, unless you're in an active Chapter 13 case, which offers a temporary co-debtor stay.

• Timing matters. Taking out a large personal loan shortly before filing, especially with no realistic ability to repay it, can draw creditor scrutiny and a possible fraud challenge, even without the automatic presumption that applies to credit cards.

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Are Personal Loans Dischargeable in Bankruptcy?

Yes, in most cases. A typical unsecured personal loan, one you took out without pledging collateral, is treated the same way as a credit card balance or medical bill in bankruptcy: it's eligible for discharge, meaning the court can legally eliminate your obligation to repay it.

• In Chapter 7, personal loans are generally discharged along with your other eligible unsecured debt, typically within three to six months of filing.

• In Chapter 13, any personal loan balance not fully repaid through your three- to five-year repayment plan is generally discharged once you complete the plan.

When Can a Personal Loan Be Excluded From Discharge?

There are a few scenarios where a personal loan can survive bankruptcy, even though it's otherwise a dischargeable type of debt.

Actual Fraud

Under 11 U.S.C. Section 523(a)(2)(A), a debt isn't dischargeable if you obtained it through false pretenses, a false representation or actual fraud, for example, lying about your income on the loan application or taking out a loan you never intended to repay. To succeed on this claim, the lender generally has to prove:

• You made a materially false statement.

• You knew it was false and intended to deceive the lender.

• The lender reasonably relied on that false statement.

• The lender was damaged as a result.

This is a real but relatively high bar for a creditor to clear on its own, since there's no automatic presumption working in the lender's favor here.

A Common Point of Confusion: The Credit Card-Specific Fraud Presumption

Many articles about bankruptcy and recent debt mention a rule that makes certain purchases "presumed fraudulent," but it's worth understanding exactly what this rule covers, because it doesn't automatically apply to personal loans.

Under 11 U.S.C. Section 523(a)(2)(C), for cases filed between April 1, 2025, and March 31, 2028:

• Purchases of luxury goods or services totaling more than $900 from a single creditor within 90 days before filing are presumed non-dischargeable.

• Cash advances totaling more than $1,250 within 70 days before filing are presumed non-dischargeable.

The key detail: this presumption specifically applies to debt from an "open end credit plan," the legal term, defined by reference to the Truth in Lending Act, for revolving credit like credit cards. A typical personal loan is a closed-end installment loan, not an open-end credit plan, so this specific automatic presumption generally doesn't apply to it.

That doesn't mean a recently taken-out personal loan is automatically safe from a fraud challenge. If a lender can show you took out a personal loan shortly before filing with no genuine intent or ability to repay it, they can still pursue an actual fraud claim under Section 523(a)(2)(A). It's just a harder case for the lender to prove without the automatic presumption's help.

A Related Trap: Repaying Family or Friends Before You File

Fraud isn't the only thing that can complicate a recent personal loan. If you use loan funds, or any other money, to pay back a family member or friend shortly before filing, a bankruptcy trustee can treat that as a preference payment and claw it back.

Ordinary creditors get a 90-day look-back window, but payments to "insiders," a category that includes relatives and close business associates, get a full one-year look-back under 11 U.S.C. Section 547. That means a loan repayment to a parent or sibling ten months before you file can still be unwound and redistributed among your other creditors, even if nothing about the payment was fraudulent.

What Happens to a Secured Personal Loan in Bankruptcy?

Some personal loans, particularly vehicle-equity loans or loans secured by home fixtures, are backed by collateral rather than being fully unsecured.

This changes the picture, and it's part of the broader secured vs. unsecured loans distinction worth understanding before you file:

In other words, bankruptcy can eliminate your personal liability to repay a secured personal loan, but it generally doesn't erase the lender's right to take back the collateral if you stop making payments and want to keep the property.

What Happens to a Co-Signer if a Personal Loan Is Discharged?

If someone co-signed your personal loan, discharging your obligation in bankruptcy doesn't discharge theirs. The lender can still pursue your co-signer for the full remaining balance after your case concludes.

There's one notable exception: if you file Chapter 13 specifically, the co-debtor stay under 11 U.S.C. Section 1301 can temporarily pause collection efforts against your co-signer while your case is active, as long as the debt is a personal, non-business obligation and your plan proposes to pay it in full. This protection doesn't exist in Chapter 7, and it ends if your case is dismissed or converts.

Does Including a Personal Loan in Bankruptcy Affect Your Credit?

Including a personal loan in your bankruptcy filing doesn't independently create a separate credit hit beyond the bankruptcy filing itself. The bankruptcy is what significantly affects your credit, staying on your report for up to 10 years for Chapter 7 or about seven years for a completed Chapter 13, regardless of how many individual debts, including personal loans, are discharged within it.

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms and fees from different lenders and choose the best offer for you.

Do You Qualify To File for Bankruptcy?

Bankruptcy is meant to be a last resort, and not everyone who wants to file will qualify. Here's what each chapter generally requires:

• Chapter 7: You'll need to pass a means test that compares your income to your state's median income, showing you don't have enough disposable income to repay your debts.

• Chapter 13: You'll need to show regular income that can support a court-approved repayment plan.

• No recent discharge. You generally can't get another Chapter 7 discharge until eight years have passed since your prior Chapter 7 filing date, or two years for a repeat Chapter 13 discharge.

• Credit counseling. Completing an approved credit counseling course is required before you file.

What Should You Do if You Can't Pay Your Personal Loan?

If a personal loan payment is starting to feel out of reach, there may be less drastic options than bankruptcy. Here's where to start:

1. Contact your lender about hardship options. Reach out as soon as you know a payment is at risk. Lenders often prefer working out a plan over getting little to nothing back through a bankruptcy filing.

2. Look into debt consolidation or settlement. A debt consolidation program or settlement can help, as long as you're confident you can keep up with the new payment terms.

3. Talk to a nonprofit credit counselor. Choose a program approved by the U.S. Department of Justice, not a for-profit company, to get help managing debt and using credit going forward.

For more ideas, compare debt relief options or explore other ways to pay off debt before deciding bankruptcy is your best move.

Can You Get a Personal Loan After Bankruptcy?

Yes, though you may need to wait roughly a year or two after your debts are discharged before lenders will consider you again. Keep in mind that a Chapter 13 filing can stay on your credit report for about seven years, while Chapter 7 can stay on for about 10 years, both counted from your filing date. During that window, you can expect higher interest rates and stricter terms until you rebuild your credit profile.

A credit builder loan, paired with consistent, on-time payments, can help you start building credit again after discharge. Once you've shown consistent income and improved your credit score, you may qualify for a personal loan after bankruptcy with better terms.

Where Can You Find Lenders That Work With Bankruptcies?

Online lenders may offer more flexibility for borrowers with a discharged bankruptcy than traditional banks. Look for lenders that mention working with applicants who have lower credit, like those offering personal loans for bad credit or a loan with a 500 credit score.

If your situation is especially tight, hardship loans built for that purpose may be worth a look too. Approval isn't guaranteed, and rates will likely run higher than what borrowers with strong credit qualify for, so it's worth comparing options from a few lenders before you commit.

As more time passes and the bankruptcy's effect on your credit score fades, a credit union, especially one you already belong to, may offer more favorable terms than a bank.

Common Mistakes To Avoid

• Assuming the credit-card fraud presumption applies to your personal loan. It generally doesn't, since personal loans are typically closed-end credit, not the "open end credit plan" the rule specifically targets.

• Taking out a large personal loan right before filing. Even without the automatic presumption, a lender can still pursue an actual fraud claim if the timing and circumstances suggest you never intended to repay it.

• Repaying family or friends before you file. A payment to a relative or close associate within the year before filing can be clawed back as a preference payment, even if it wasn't fraudulent.

• Forgetting your co-signer's exposure. Discharging your personal loan doesn't protect a co-signer outside of an active Chapter 13 case. Talk to them, and to a bankruptcy attorney, about what that means for your specific situation.

• Confusing a secured personal loan with an unsecured one. If your loan is backed by collateral, know that discharge won't stop the lender from repossessing that property if you stop paying.

• Not disclosing the personal loan on your bankruptcy schedules. All debts, including personal loans, need to be listed. Omitting one can create real complications for your case.

Bottom Line

In most cases, yes, personal loans can be included in and discharged through bankruptcy, since they're typically unsecured debt treated the same way as credit card balances. The main exceptions involve fraud, and it's worth knowing that the well-known "recent purchase" presumption of fraud specifically targets credit cards, not personal loans, so a personal loan generally needs to clear the higher bar of actual fraud to be excluded from discharge. If your loan is secured by collateral or has a co-signer, those factors change what discharge actually accomplishes.

Since the process can take anywhere from a few months to five years and affects your credit for years afterward, it's worth trying hardship programs, consolidation or nonprofit credit counseling first, and talking through your specific situation with a bankruptcy attorney before you file.

Key Terms

• Unsecured debt: Debt not backed by collateral, like most personal loans and credit cards, which is generally easier to discharge in bankruptcy.

• Secured debt: Debt backed by collateral, such as a vehicle-equity personal loan, where the lien on that property generally survives discharge.

• Actual fraud (11 U.S.C. Section 523(a)(2)(A)): A general standard requiring a creditor to prove a false statement, intent to deceive and reasonable reliance to exclude a debt from discharge.

• Open-end credit plan: Revolving credit, like a credit card, subject to the specific fraud presumption rules under Section 523(a)(2)(C). This doesn't typically apply to closed-end personal installment loans.

• Preference payment: A payment to a creditor shortly before filing that a trustee can claw back, with a 90-day look-back for ordinary creditors and a one-year look-back for insiders like family members.

• Co-debtor stay: A Chapter 13-specific protection under 11 U.S.C. Section 1301 that can temporarily pause creditor collection against a co-signer while your case is active.

• Means test: A calculation comparing your income to your state's median income to determine Chapter 7 eligibility.

• Discharge: The court order that legally eliminates your personal obligation to repay a qualifying debt.

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Sources

• Legal Information Institute: 11 U.S.C. Section 523, Exceptions to Discharge

• Legal Information Institute: 11 U.S.C. Section 1301, Stay of Action Against Codebtor

• Legal Information Institute: 11 U.S.C. Section 547, Preferences

• Legal Information Institute: 15 U.S.C. Section 1602, Truth in Lending Act Definitions

• U.S. Courts: Chapter 7 Bankruptcy Basics

• U.S. Courts: Chapter 13 Bankruptcy Basics

Summary generated by AI, verified by MoneyLion editors

FAQ

Here are quick answers to common questions about personal loans and bankruptcy.

Can you include a personal loan in Chapter 7 bankruptcy?

Yes. A typical unsecured personal loan is treated like a credit card balance or medical bill and is generally discharged along with your other eligible unsecured debt.

Can you include a personal loan in Chapter 13 bankruptcy?

Yes. Any remaining balance on a personal loan not fully repaid through your three- to five-year repayment plan is generally discharged once you complete the plan.

Can a personal loan be denied discharge for fraud?

Yes, but it requires the lender to prove actual fraud: a false statement you knew was false, made with intent to deceive, that the lender reasonably relied on. The automatic "presumption of fraud" for recent luxury purchases and cash advances specifically applies to credit cards, not typical personal loans.

What happens to a secured personal loan in bankruptcy?

Discharge eliminates your personal obligation to repay it, but the lender's lien on the collateral, such as a vehicle or home fixtures, generally survives. You'll need to keep paying, reaffirm the debt or otherwise resolve the secured debt to keep the property.

Does discharging a personal loan protect my co-signer?

No, not in Chapter 7. Your co-signer remains fully liable for the debt. In an active Chapter 13 case specifically, the co-debtor stay can temporarily pause collection against them while your case is ongoing, as long as the debt is personal and your plan pays it in full.

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