When Can Bankruptcy Discharge a Loan?

Bankruptcy can remove personal liability for many unsecured loans—credit cards, medical bills, and most personal loans—providing a fresh financial start. But some loans are commonly protected from discharge or require extra steps (for example, student loans require an adversary proceeding to prove “undue hardship”). This guide explains which loans are typically dischargeable, the legal limits, and the step-by-step process you’ll follow in bankruptcy.

Sources used in this entry include the U.S. Courts, the Consumer Financial Protection Bureau (CFPB), and the IRS. This article is educational and not legal advice—consult a bankruptcy attorney to evaluate your specific situation.

1) Which loans are usually dischargeable?

  • Unsecured consumer debts: credit cards, medical bills, many personal installment loans, and utility bills are generally dischargeable in Chapter 7 and can be included in a Chapter 13 plan. These are the debts most people think of when they consider bankruptcy.
  • Private unsecured lines of credit and third‑party debts (subject to state law and creditor defenses) are often dischargeable.

Why: unsecured debts do not have collateral attached to them and are specifically addressed by the bankruptcy discharge.

Authoritative reference: U.S. Courts — overview of dischargeable debts (uscourts.gov).

2) Which loans commonly survive bankruptcy?

Certain debts are presumptively nondischargeable—meaning bankruptcy won’t eliminate your obligation unless you meet a specific legal exception:

  • Student loans (federal and private): generally non‑dischargeable unless the debtor proves “undue hardship” in an adversary proceeding. Many courts use the Brunner test or a totality‑of‑circumstances test to decide undue hardship. See U.S. Courts and CFPB guidance for more detail.
  • Recent income tax liabilities: many income taxes are dischargeable only if they satisfy strict timing and filing requirements (see the “tax rules” below).
  • Domestic support obligations: child support and alimony are not dischargeable (11 U.S.C. §523(a)(5)).
  • Debts for fraud, embezzlement, willful and malicious injury, DUI‑related torts, certain fines and penalties, and recent government claims are generally nondischargeable (11 U.S.C. §523).
  • Secured loans: the debt itself may be dischargeable, but the creditor’s lien on collateral survives unless the lien is avoided. In practice, that means secured creditors can repossess or foreclose unless you reaffirm the loan or redeem the property.

Authoritative reference: U.S. Courts — exceptions to discharge; see also CFPB materials on bankruptcy and student loans.

3) Special rules: student loans and undue hardship

  • Student loans are not automatically discharged. You must file a separate adversary proceeding inside your bankruptcy case and persuade the court that repaying the loan would cause undue hardship.
  • Most circuits apply the Brunner test (three elements: inability to maintain minimal living standards if forced to repay; additional circumstances suggesting this state will persist; good faith efforts to repay), while other courts use a totality‑of‑the‑circumstances approach.
  • Outcome: discharge is rare but possible in compelling cases (permanent disability, long‑term inability to work, or other extreme circumstances).

Reference: CFPB and U.S. Courts explain the adversary proceeding requirement.

4) Special rules: tax debts

Not all taxes are dischargeable. Federal income taxes may be discharged if all of these are true:

  1. The tax return for the year in question was due (including extensions) at least three years before you file for bankruptcy (“three‑year rule”).
  2. The tax return was actually filed at least two years before the bankruptcy filing (“two‑year rule”).
  3. The tax was assessed by the IRS at least 240 days before the bankruptcy filing (subject to exceptions for certain IRS actions).
  4. The tax is an income tax (not trust fund taxes, excise taxes, or penalties in many cases) and there was no fraud or fraudulent return for that tax year.

These timing rules are strict; missing any one of them can make the tax nondischargeable. See IRS guidance and U.S. Courts materials for precise rule language.

Reference: IRS and U.S. Courts (bankruptcy and tax discharge rules).

5) Chapter choice matters: Chapter 7 vs Chapter 13

  • Chapter 7 (liquidation): Most unsecured debts are discharged at the end of a short process (typically 3–6 months). You might lose nonexempt assets, but many filers have no assets to liquidate under state exemptions.
  • Chapter 13 (reorganization / repayment plan): You propose a 3–5 year plan to pay some or all debts based on your disposable income. At the plan’s completion, certain remaining unsecured debts can be discharged. Chapter 13 is often used to keep secured properties (house or car) by catching up arrears.

Credit report impact: Chapter 7 generally remains on credit reports for 10 years; Chapter 13 for 7 years (major credit reporting agencies). Timeframes and credit outcomes vary.

Reference: U.S. Courts guide to Chapters 7 and 13.

6) Typical timeline and process (step‑by‑step)

  1. Pre‑filing preparation: collect pay stubs, tax returns (two years), list of debts, assets, and expenses. Meet with a bankruptcy attorney and complete credit counseling (required within 180 days before filing).
  2. File petition and schedules: when you file, an automatic stay immediately halts most creditor collection actions (11 U.S.C. §362).
  3. Trustee appointment and 341 meeting: the U.S. Trustee appoints a trustee; you attend the meeting of creditors (341) about 20–40 days after filing.
  4. Objections/adversary proceedings: creditors can object to discharge or file adversary proceedings to declare a debt nondischargeable (common for student loans or fraud claims). If you seek student loan discharge, you must file an adversary proceeding.
  5. Trustee administration: in Chapter 7, the trustee may sell nonexempt assets to pay creditors. In Chapter 13, you make plan payments to the trustee for 3–5 years.
  6. Discharge order: if no successful objections are filed and you complete required steps (and credit counseling/debtor education), the court issues a discharge order eliminating qualifying debts.

Reference: U.S. Courts — typical bankruptcy timeline and the automatic stay.

7) What happens to secured loans (cars, mortgages)?

Secured debts require a different approach: bankruptcy can eliminate personal liability, but it does not automatically remove the creditor’s lien on the collateral. Options include:

  • Reaffirmation: agree with the lender to keep the loan and remain personally liable.
  • Redemption: pay the lender the current market value in a lump sum (rare in practice).
  • Surrender: give the collateral back and the secured debt is satisfied by the creditor’s repossession (you may still owe a deficiency depending on state law).
  • In Chapter 13: cure arrears over the plan period while keeping the property.

For more on how secured loans behave in bankruptcy, see our FinHelp post “Bankruptcy and Loan Discharge: What Debts Usually Survive”.

Internal resource: Bankruptcy and Loan Discharge: What Debts Usually Survive — https://finhelp.io/glossary/bankruptcy-and-loan-discharge-what-debts-usually-survive/

8) Practical examples from practice

  • Example 1 — unsecured credit card debt: a Chapter 7 filer with primarily credit card and medical debt typically receives a full discharge of those unsecured balances within months, subject to trustee review and exemption law.
  • Example 2 — car loan: a debtor can either keep the car and continue payments (or reaffirm), redeem it, or surrender it. The car lender’s lien survives the discharge unless the lien is avoided.
  • Example 3 — student loans: in rare cases of long‑term disability or terminal illness I’ve seen in practice, a judge granted a student loan discharge after an adversary proceeding demonstrating undue hardship.

9) Common mistakes and how to avoid them

  • Assuming student loans will be wiped out automatically — they almost never are without an adversary proceeding.
  • Failing to file required pre‑ and post‑filing credit counseling and debtor education (these are prerequisites for discharge).
  • Underestimating tax timing rules — don’t guess whether a tax year is dischargeable; ask counsel.
  • Not listing every creditor or debt on the schedules — omission can prevent discharge.

10) Professional tips

  • Talk to a bankruptcy attorney early — small differences in timing, exemptions, or filing choices can change whether a debt is dischargeable.
  • Gather two years of tax returns and proof of income before meeting your attorney or filing.
  • If student loans are your primary debt, evaluate alternatives (income‑driven repayment, loan rehabilitation, settlements) before pursuing an adversary proceeding; it is expensive and outcomes are uncertain. See our FinHelp article “Bankruptcy Discharge vs Student Loan Discharge: Key Differences” for deeper context.

Internal resource: Bankruptcy Discharge vs Student Loan Discharge: Key Differences — https://finhelp.io/glossary/bankruptcy-discharge-vs-student-loan-discharge-key-differences/

11) After the discharge: credit, taxes, and next steps

  • Credit reports: discharged debts are reported as “discharged” or “included in bankruptcy.” A Chapter 7 stays on credit reports up to 10 years and Chapter 13 up to 7 years.
  • Tax consequences: forgiven debt can sometimes create taxable income, but bankruptcy discharge has special rules; consult a tax advisor and IRS guidance.
  • Rebuilding: create a plan to rebuild emergency savings and credit — many former filers qualify for new credit and mortgages within a few years with disciplined budgeting.

Reference: CFPB and U.S. Courts on rebuilding after bankruptcy.

12) Authoritative sources

Professional disclaimer: This article is educational and reflects common practice as of 2025. It is not legal advice. Bankruptcy law is fact‑specific; consult a licensed bankruptcy attorney to determine how these rules apply to your case.

If you want a focused starting point, read FinHelp’s practical guide on which debts usually survive bankruptcy (linked above) or our overview of bankruptcy options for tax debt.