When can bankruptcy discharge loan debt?
Bankruptcy can discharge loan debt when the debt falls into a category that the Bankruptcy Code allows to be wiped out and the filer meets eligibility and procedural requirements. Most unsecured consumer loans—credit cards, personal loans, and medical bills—are commonly dischargeable in Chapter 7 and Chapter 13 bankruptcies, while secured debts and special categories (student loans, recent taxes, most domestic support obligations) usually survive the case unless narrow exceptions apply (U.S. Courts: Bankruptcy Basics).
Below I explain how discharge works in real cases, what types of loans are eligible, practical steps for preparation, and common pitfalls I’ve seen working with clients over 15 years advising people through this process.
How discharge differs by chapter
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Chapter 7 (liquidation): A trustee sells nonexempt assets to pay creditors and most qualifying unsecured debts are discharged at the end of the case (typically months). Chapter 7 is the fastest path to discharge for eligible filers (see US Courts: Bankruptcy Basics).
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Chapter 13 (reorganization): You keep most property and repay creditors through a court-approved 3–5 year plan. Remaining unsecured debt may be discharged at plan completion; secured debts generally survive unless cured in the plan or surrendered. Chapter 13 can be useful when you want to keep a home or car.
For a deeper look at the differences, see our guides: Chapter 7 Bankruptcy Explained and Chapter 13 Bankruptcy Explained.
(Internal links: Chapter 7 – https://finhelp.io/glossary/chapter-7-bankruptcy-explained/ ; Chapter 13 – https://finhelp.io/glossary/chapter-13-bankruptcy-explained/)
Which loans are typically dischargeable
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Unsecured personal loans and credit card balances: Usually dischargeable in both Chapter 7 and Chapter 13 unless the lender obtains a court ruling (rare) showing fraud or misrepresentation.
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Medical bills: Commonly dischargeable because they are unsecured obligations.
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Some small business debts: Sole proprietors generally discharge business debts in personal bankruptcy; corporations/LLCs follow separate rules.
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Debt settled or negotiated pre-petition is often still dischargeable, but settlement can produce taxable income (see IRS guidance).
Important exception: student loans are presumptively non-dischargeable unless the debtor proves “undue hardship” in an adversary proceeding—a high legal standard in most courts (Consumer Financial Protection Bureau).
Secured loans: discharge vs. reclaiming collateral
Secured loans (mortgages, auto loans) are secured by property. Filing bankruptcy does not automatically eliminate the lien:
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If you surrender the collateral (e.g., the car), the secured debt is typically discharged, but the lender retains the right to sell the property to satisfy the loan.
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If you want to keep the property, Chapter 13 lets you repay arrears over time and may strip junior liens in certain situations; Chapter 7 may allow reaffirmation (agreeing to keep paying) or redemption in limited cases. Reaffirmation agreements must be voluntary and approved by the court (U.S. Courts).
Common nondischargeable debts (frequent surprises)
- Most federal student loans (unless undue hardship proven)
- Child support and most alimony (domestic support obligations)
- Recent income and payroll taxes unless strict criteria are met (IRS: discharge rules for tax debts)
- Debts from fraud, certain criminal fines, and some court-ordered obligations
For tax debts, there are narrow rules—older tax liabilities can be dischargeable if the tax return was due at least three years ago, the return was filed at least two years before filing bankruptcy, and the tax was assessed more than 240 days before the bankruptcy filing (see IRS and bankruptcy references). Always check with your tax professional or attorney because exceptions and procedural requirements matter.
Typical timeline and process
- Credit counseling: You must complete an approved credit counseling course before filing (BAPCPA requirement).
- Filing petition: An automatic stay stops most collection efforts immediately after filing.
- Meeting of creditors (341 meeting): The trustee and creditors can ask questions about your finances.
- Trustee administration: In Chapter 7, the trustee looks for nonexempt assets to liquidate; in Chapter 13, the trustee monitors your repayment plan.
- Discharge: If the court grants it, discharge usually follows within months for Chapter 7 and after plan completion for Chapter 13.
(Reference: U.S. Courts: Bankruptcy Basics; Consumer Financial Protection Bureau.)
Real-world examples and professional observations
In my practice I’ve observed these patterns:
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Many clients with high unsecured credit-card and medical debt receive a full discharge under Chapter 7 and can rebuild after a period of credit re-establishment.
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Filers who want to keep real property often use Chapter 13 to cure mortgage defaults over time; Chapter 13 is also commonly used to protect co-signers of auto loans by reorganizing payments.
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People who try to discharge student loans without counsel usually fail; an adversary proceeding is required and outcomes vary by jurisdiction.
Example: A client with $40,000 in unsecured credit card debt and no nonexempt assets filed Chapter 7 and received a discharge in about four months. Because her debts were unsecured and she passed the means test, creditors had no collateral to claim and did not oppose the discharge.
Eligibility and the means test
Chapter 7 eligibility is subject to the means test, which compares your household income to your state median for a household of your size. If your income is above the median, you may still qualify after allowable expenses are deducted, but many higher-income filers are steered to Chapter 13.
Chapter 13 requires regular income sufficient to fund a 3–5 year plan and is appropriate when you need to catch up on secured debts or protect property.
A bankruptcy attorney or certified counselor can run the calculations and recommend the right chapter for your situation.
Practical steps to prepare
- Gather documentation: paystubs, tax returns (typically two years), bank statements, lists of creditors, and asset inventories.
- Complete required credit counseling and, after filing, a debtor education course to receive a discharge.
- Consider alternatives: negotiate with creditors, explore debt management plans through nonprofit credit counselors, or evaluate debt settlement offers carefully.
- Consult a qualified bankruptcy attorney. My experience shows that early legal advice reduces errors that can delay discharge or create unexpected nondischargeable outcomes.
Effect on credit and life after discharge
Bankruptcy will appear on credit reports (Chapter 7 for up to 10 years; Chapter 13 for up to 7 years), but a discharge removes personal liability for discharged debts and stops most collection activity. Rebuilding credit is possible by managing secured credit cards, steady payments, and maintaining an emergency fund.
Common mistakes and how to avoid them
- Assuming student loans will discharge automatically—seek counsel if you need an adversary proceeding.
- Hiding assets or omitting information—these actions can lead to denial of discharge or criminal penalties.
- Not completing required counseling or debtor education courses—missing these steps can prevent a discharge.
Where to learn more (authoritative sources)
- U.S. Courts — Bankruptcy Basics: https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics
- Consumer Financial Protection Bureau — Bankruptcy information: https://www.consumerfinance.gov/ask-cfpb/whats-bankruptcy-en-746/
- IRS — What happens to my debt if I file bankruptcy: https://www.irs.gov/businesses/small-businesses-self-employed/what-happens-to-my-debt-if-i-file-bankruptcy
For additional context about how bankruptcy can eliminate or modify specific loans, see our related guides “Loan Forgiveness and Discharge: When Bankruptcy May Lead to Loan Discharge” and “When Bankruptcy Can Eliminate a Loan: What to Expect”.
(Internal links: https://finhelp.io/glossary/loan-forgiveness-and-discharge-when-bankruptcy-may-lead-to-loan-discharge/ ; https://finhelp.io/glossary/when-bankruptcy-can-eliminate-a-loan-what-to-expect/)
Professional disclaimer
This article is educational and does not constitute legal or tax advice. Bankruptcy consequences vary by state and individual circumstances; consult a qualified bankruptcy attorney and your tax advisor before taking action.
Quick checklist before filing
- Complete pre-filing credit counseling.
- Collect two years of tax returns and recent paystubs.
- Make a list of all creditors, balances, and secured property.
- Speak with a bankruptcy attorney to review eligibility and likely outcomes.
