Loan Discharge After Bankruptcy: What Types of Debt Can Be Eliminated?

Quick overview

A loan discharge after bankruptcy cancels your legal obligation to pay certain debts. Which loans can be wiped out depends on the bankruptcy chapter you file, the debt’s legal status (secured, unsecured, or priority), and statutory exceptions. This article summarizes common dischargeable debts, the exceptions you must watch for, and practical next steps based on over 15 years advising clients in insolvency situations.

Which loans and debts are commonly dischargeable?

• Credit card debt: Unsecured credit-card balances are among the most commonly discharged obligations in Chapter 7 and Chapter 13 cases (after completion of a Chapter 13 plan). These are typically fully dischargeable. (See U.S. Courts, Discharge information.)
• Medical bills: Medical debt is unsecured and generally dischargeable in both Chapter 7 and Chapter 13.
• Personal loans: Unsecured signature loans and many payday loans can be discharged, unless they are secured by collateral.
• Utility bills and most collection accounts: Unpaid utility bills and most consumer collection claims can usually be eliminated.
• Deficiency balances after repossession: If you surrender collateral (a car, for example) and a creditor obtains a deficiency judgment, that unsecured deficiency may be dischargeable.

Authority: U.S. Courts, “Chapter 7 and Chapter 13” pages and Consumer Financial Protection Bureau (CFPB) resources explain which consumer debts are dischargeable under bankruptcy law.

Secured debt vs unsecured debt — what happens to loans with collateral?

Secured loans are backed by specific property — a mortgage by a house, an auto loan by a vehicle. Bankruptcy affects secured debts in three main ways:

1. Keep and pay: Under Chapter 13, you can keep property and repay arrears through the plan while continuing regular payments.
2. Surrender: You can surrender collateral and discharge the associated personal liability (subject to state deficiency laws). For example, surrendering a car may discharge the loan if the creditor repossesses and you do not owe a separate deficiency or the deficiency is discharged.
3. Redeem or reaffirm: Chapter 7 allows redemption (paying a lump sum equal to the collateral’s value) or reaffirmation agreements in limited cases. Redemption and reaffirmation are options with legal and financial consequences and should be reviewed with counsel.

Because treatment of secured credit varies with chapter and state law, speak with a bankruptcy attorney to confirm outcomes for mortgages, auto loans, and liens.

Debts usually not dischargeable — loans that typically survive bankruptcy

Certain obligations survive bankruptcy except in narrow circumstances:

• Student loans: As a general rule, federal and private student loans are nondischargeable unless you prove “undue hardship” in an adversary proceeding. Courts often apply the Brunner test or similar standards; meeting this test is difficult and rare. There are other narrow paths such as total-and-permanent-disability discharge or administrative forgiveness programs (see Department of Education guidance). (CFPB; U.S. Courts.)
• Child support and most alimony: These are priority domestic-support obligations and cannot be discharged.
• Recent tax debts: Many recent income tax obligations cannot be discharged. Older tax debt may be dischargeable if it meets strict criteria (the “three-year rule,” return-filing requirements, and more). See IRS guidance on bankruptcy and tax debts.
• Debts from fraud or willful misconduct: Debts incurred through fraud, false pretenses, or willful and malicious injury to property are often nondischargeable if a creditor successfully objects under 11 U.S.C. §523.
• Criminal fines, certain traffic penalties, and many government-backed claims: These categories are typically excluded from discharge.

Student loans in detail — why they’re different

Student loans are a frequent source of confusion. The statute presumes student loans are nondischargeable, and courts demand a high burden of proof for undue hardship. The usual route requires filing an adversary proceeding within the bankruptcy case — effectively a separate mini-lawsuit where you ask the court to find the loans dischargeable.

Options and realities:

• Undue hardship standard: Courts require evidence that repayment would prevent a minimal standard of living, that hardship is likely to persist, and that the debtor made a good-faith effort to repay. Many cases fail because the standard is stringent.
• Administrative discharges: Separate from bankruptcy, some borrowers can apply for discharge through federal programs (e.g., total-and-permanent-disability discharge). Check Department of Education rules for eligibility and documentation.

In my practice, I’ve seen only a small fraction of borrowers succeed in discharging student loans via bankruptcy. Before pursuing an adversary proceeding, weigh costs and likelihood of success.

Taxes and bankruptcy — the exceptions you must know

Not all taxes are dischargeable. The IRS and bankruptcy rules require several tests before income tax can be eliminated, including age of the tax return, whether a tax return was filed on time, and three-year/240-day rules. Payroll taxes and trust fund taxes are typically nondischargeable.

For actionable guidance, consult IRS Publication and the bankruptcy tax resources; a tax-specialist attorney or CPA can help evaluate whether specific tax liabilities meet discharge tests.

Practical steps before filing for discharge

1. Inventory your debts precisely: List balances, secured status, creditor names, account numbers, and whether any are priority (taxes, child support).
2. Credit counseling: Federal law requires a credit counseling session within 180 days before filing. Complete a pre-filing counseling and a post-filing debtor education course to receive a discharge.
3. Consult a bankruptcy attorney: An experienced attorney will identify which debts are dischargeable, whether reaffirmation is advisable for secured loans, and the need for any adversary proceedings (especially for student loans).
4. Gather documentation: Recent pay stubs, tax returns (last two years), loan agreements, and collection letters speed case preparation.

Timeline and credit impact

• Chapter 7: Case typically completes in 3–6 months; discharged debts are listed in the final order. A Chapter 7 filing often stays on credit reports for 10 years; however, many clients see improved debt-to-income and start rebuilding credit sooner.
• Chapter 13: A 3–5 year repayment plan must be completed before discharge of qualifying unsecured debts; the filing remains on credit reports for 7 years from filing.

Rebuilding credit after discharge involves steady on-time payments for remaining debts, a conservative use of new credit, and monitoring reports for inaccuracies.

Common mistakes to avoid

• Failing to list debts: Omitting a creditor can leave you personally liable after discharge if the omission was intentional.
• Ignoring secured debt options: Reaffirmation or redemption choices have long-term consequences; don’t sign without counsel.
• Assuming student loans will vanish: Plan for nondischargeable student loans unless you intend to pursue an adversary proceeding with counsel.

Helpful resources and internal guides

• For a deeper look at how different loans are treated, see our article: “How Bankruptcy Affects Different Types of Loans: What Survives and What Doesn’t” (https://finhelp.io/glossary/how-bankruptcy-affects-different-types-of-loans-what-survives-and-what-doesnt/).
• To understand the conditions under which a loan may be discharged, read: “When Bankruptcy Can Discharge Loan Debt” (https://finhelp.io/glossary/when-bankruptcy-can-discharge-loan-debt/).
• If you have tax debts, our breakdown “How Bankruptcy Affects Tax Debts, Liens, and Refunds” explains specific tax rules and exceptions (https://finhelp.io/glossary/how-bankruptcy-affects-tax-debts-liens-and-refunds/).

Authoritative external sources:

• U.S. Courts — Bankruptcy Basics and Discharge information (uscourts.gov). See sections on Chapter 7 and Chapter 13 discharges.
• Consumer Financial Protection Bureau — Consumer guides on bankruptcy and managing debt.
• Internal Revenue Service — Guidance on bankruptcy and tax debts.

Professional perspective and final advice

In my 15+ years of advising clients, the best outcomes come from early planning. If you’re considering bankruptcy because loans feel unmanageable, start by gathering paperwork and consulting a bankruptcy attorney who will compare Chapter 7 vs Chapter 13 consequences for your secured loans, student debt exposure, and tax liabilities.

Bankruptcy can and does eliminate many types of consumer loan debt, but the process has legal nuances and long-term credit implications. Use reputable counsel, complete required credit counseling, and create a post-discharge plan to rebuild savings and credit.

Disclaimer: This article is educational and does not constitute legal advice. Individual cases vary; consult a qualified bankruptcy attorney or tax professional for guidance tailored to your situation.