How Bankruptcy Affects Different Types of Loans: What Survives and What Doesn’t

How bankruptcy changes loan obligations — a practical guide

Bankruptcy can end collection calls and discharge many unsecured debts, but it does not automatically erase every loan. Which loans survive depends on the chapter you file, whether a loan is secured or unsecured, the presence of co-signers, and special rules for taxes and student loans. Below I explain the essentials, point to exceptions, and offer practical steps you can use if you’re weighing bankruptcy.

Sources and further reading: U.S. Courts (https://www.uscourts.gov), Consumer Financial Protection Bureau (https://www.consumerfinance.gov), and IRS guidance (https://www.irs.gov).

Chapter 7 vs Chapter 13 — the big picture

• Chapter 7 (liquidation): Non-exempt assets may be sold to repay creditors. Most unsecured debts (credit cards, medical bills, personal loans) are eligible for discharge. Secured creditors (mortgages, auto loans) retain their lien and can repossess or foreclose if you stop paying. Chapter 7 typically stays on credit reports up to 10 years. (U.S. Courts)

• Chapter 13 (reorganization): You propose a 3–5 year repayment plan to the court and creditors. Chapter 13 lets many filers keep secured property if they keep up payments and meet plan terms; it also enables cramdowns, lien-stripping, and catch-up plans for mortgages in some situations. Chapter 13 typically stays on credit reports up to 7 years. (U.S. Courts)

Both chapters trigger an automatic stay that halts most collection activity immediately after filing. (U.S. Courts)

Secured vs unsecured loans: the key distinction

• Secured loans are backed by collateral (house, car). Bankruptcy can discharge your personal obligation to pay, but it does not remove the lender’s lien on the collateral unless you strip or cram it down in Chapter 13 or pay the lender through the plan. If you want to keep the asset you generally must keep making the contract payments or reaffirm the debt. (U.S. Courts)

• Unsecured loans (credit cards, medical bills, most personal loans) are the most likely to be discharged in both Chapter 7 and Chapter 13 if there are no exceptions.

How bankruptcy affects common loan types

Mortgages

• What typically happens: The lender keeps the mortgage lien. You can either:

• Keep the home and continue paying the mortgage (Chapter 13 makes catching up on missed payments possible via a plan);

• Surrender the home (stop payments and allow foreclosure/relinquishment);

• Reaffirm the mortgage (less common for primary residences).

• Important details: Chapter 13 can cure arrears over time and may allow stripping of wholly unsecured junior liens in some cases. You generally cannot cram down a primary mortgage on your principal residence. (U.S. Courts)

• Tip: If foreclosure is imminent, Chapter 13’s catch-up plan can stop a sale while you cure the default. Discuss strategy with a bankruptcy attorney.

Car loans

• What typically happens: If you stop paying and don’t reaffirm, the lender can repossess the vehicle even after discharge, because the lien survives unless you redeem or reaffirm.

• Special rules: Chapter 13 allows modification of secured vehicle loans in some circumstances. For cars purchased more than 910 days before filing, Chapter 13 may allow a cramdown to reduce the secured portion to the current value of the car — lowering monthly payments. For recently purchased vehicles (within 910 days), cramdown on purchase-money loans is typically not allowed. (U.S. Courts)

• Options: Reaffirm the loan (keep the contract and payment terms), redeem the vehicle by paying its current value in a lump sum, or surrender it.

Credit cards and personal loans

• What typically happens: These unsecured debts are the most likely to be discharged in Chapter 7 and Chapter 13, eliminating the legal obligation to pay after discharge. Card accounts are usually closed by issuers, and negative marks remain on your credit report for years.

• Practical note: Discharged does not prevent a card issuer from pursuing a cosigner.

Student loans

• What typically happens: Federal and most private student loans are not dischargeable in a standard bankruptcy filing. To remove them you must file an adversary proceeding and prove “undue hardship,” a difficult legal standard that varies by circuit and often requires meeting the three-part Brunner test in many courts.

• Realistic expectations: Discharge is rare but possible in narrow circumstances. CFPB resources and specialized bankruptcy attorneys can help you evaluate whether your situation meets the standard. See also our deeper discussion: Bankruptcy and Student Loan Discharge: Realities and Myths.

Tax debt

• What typically happens: Some older income tax debts can be discharged if they meet strict IRS and bankruptcy requirements (age of the return, assessment date, return filing timeliness, no fraud). Recent tax liabilities, payroll taxes, and certain tax penalties are generally non-dischargeable. (IRS; U.S. Courts)

• For more detail see our guide: Handling Back Taxes During Bankruptcy: What Stays and What Goes.

Judgments, liens and secured claims

• Judicial judgments can become liens that survive discharge unless properly avoided. Chapter 13 may allow lien stripping for wholly unsecured junior liens, but the rules are technical and jurisdiction-specific.

Co-signers and guarantors

• Filing removes your personal obligation on discharged debts, but co-signers remain liable unless they file too or the creditor agrees otherwise. Always discuss co-signer consequences before filing.

Practical steps to protect what matters

1. Inventory debts and contracts. Note which loans are secured, which have co-signers, and which might be exempt. Keep clear copies of loan documents and payment histories.
2. Talk to a bankruptcy attorney early — the right chapter and timing matter. The 2005 BAPCPA reforms added means testing and other gates that affect eligibility. (U.S. Courts)
3. Consider alternatives first (settlement, debt management, negotiation). In some cases a structured repayment avoids losing collateral.
4. If you plan to keep a secured asset, budget for the reaffirmation/redemption or plan payments. Chapter 13 plans require realistic income projections and commitment to plan payments.
5. Protect co-signers — communicate your plan and explore co-signer relief options.

Common mistakes and misconceptions

• Thinking bankruptcy erases every debt. Student loans, many tax debts, and child support/nonsupport obligations usually survive.
• Believing discharge removes liens on property. Discharge removes personal liability but not the lien unless the lien is avoided or stripped by the court.
• Waiting too long to file while foreclosure or repossession processes advance — early legal advice can preserve options.

Rebuilding credit and long-term outlook

• A bankruptcy discharge gives a fresh start but stays on credit reports (Chapter 7 up to 10 years; Chapter 13 up to 7 years). Lenders will view you differently, but many borrowers obtain new credit within months and rebuild scores over 2–4 years with steady payments and responsible credit use.

• Practical rebuilding steps: establish and stick to a budget, build emergency savings, consider a secured credit card or small installment loan, and monitor your credit reports for accuracy.

Additional resources and related FinHelp articles

• Chapter 7 basics: Chapter 7 Bankruptcy Explained
• Student loan specifics: Bankruptcy and Student Loan Discharge: Realities and Myths
• Tax guidance: Handling Back Taxes During Bankruptcy: What Stays and What Goes

Professional disclaimer: This article is educational and does not constitute legal or financial advice. Bankruptcy law is complex and fact-specific — consult a licensed bankruptcy attorney or certified financial professional about your situation.

Authoritative sources cited: U.S. Courts — Bankruptcy Basics (https://www.uscourts.gov/services-forms/bankruptcy), Consumer Financial Protection Bureau (https://www.consumerfinance.gov), Internal Revenue Service (https://www.irs.gov).