Introduction
Bankruptcy can stop collection activity and, in many cases, eliminate personal liability for certain loans. If you’re facing overwhelming unsecured debt—credit cards, medical bills, or personal loans—bankruptcy may provide a legal path to a fresh financial start. However, not all loans are dischargeable, and the route you choose (Chapter 7 vs. Chapter 13) affects which obligations are eliminated, which must be repaid, and what you keep.
How the process stops collection and eliminates debt
- Automatic stay: The moment you file, an automatic stay stops most collection calls, lawsuits, wage garnishments, and repossessions (U.S. Courts). This gives immediate relief while the case proceeds.
- Discharge vs. repayment plan: A discharge permanently relieves you of personal liability for qualifying debts (commonly available in Chapter 7). A Chapter 13 plan reorganizes debts into a 3–5 year repayment schedule; at the successful completion of that plan, remaining eligible unsecured debt is discharged (U.S. Courts, CFPB).
Which loans are commonly eliminated
- Unsecured consumer debts: Credit card balances, medical bills, merchant debts, and many personal loans are typically dischargeable in Chapter 7 and are treated favorably in Chapter 13 plans (subject to exemptions and trustee administration) (U.S. Courts, CFPB).
- Secured debts: A secured loan (like a car loan or mortgage) is tied to collateral. Bankruptcy does not automatically erase the lien on the collateral. Options include:
- Surrender: Give up the collateral and the secured claim is treated as unsecured for any deficiency balance (often dischargeable).
- Reaffirmation: Agree with the lender to keep paying and remain personally liable (usually used for cars or other necessary property).
- Redemption or cramdown (Chapter 13): In Chapter 13, you may pay the lender the collateral’s current value over the plan (cramdown) or redeem the asset by paying a lump-sum equal to value in some cases. Note: a cramdown of a car loan is not permitted in Chapter 13 if the vehicle was purchased within 910 days before filing; rules differ for other property (U.S. Courts; National Consumer Law Center).
Debts that are typically non-dischargeable
Some obligations generally survive bankruptcy:
- Most student loans (discharge only by proving “undue hardship” in an adversary proceeding; court standards are strict) (CFPB, NCLC).
- Recent income tax debt and certain tax penalties (tax discharge has specific tests: due date more than three years before filing, tax return filed at least two years before filing, tax assessed more than 240 days before filing—refer to the U.S. Bankruptcy Code and IRS guidance).
- Child support, alimony, and many government fines or penalties.
- Debts incurred by fraud, false pretenses, or willful misconduct are often non-dischargeable if a creditor files a nondischargeability action.
Practical examples from practice
In my 15 years helping clients with consumer bankruptcy, I’ve seen three common patterns:
1) Clean slate for unsecured debt (Chapter 7). A client with heavy credit-card and medical debt files Chapter 7, keeps exempt assets, and receives a discharge within months. The unsecured loan balances are wiped out, allowing the client to rebuild cash flow and credit over time.
2) Keep and reorganize a vehicle (Chapter 13). A client behind on car payments used Chapter 13 to catch up past-due amounts through the plan while lowering monthly cash flow pressure; the car stayed with the debtor and the arrears were cured over three years.
3) Strategic surrender and fresh start. Some clients surrender second cars or vacation property they can’t afford; that eliminates future payments and allows discharge of deficiency balances on unsecured claims.
Timing, steps, and what to expect
- Pre-filing counseling: Federal law requires an approved credit counseling session within 180 days before filing (U.S. Courts).
- Filing and automatic stay: Filing the petition triggers the stay and starts the case timeline.
- Meeting of creditors (341 hearing): You’ll answer questions under oath; most consumer cases are straightforward and do not involve creditor appearances.
- Trustee review and discharge: In Chapter 7, the trustee may administer nonexempt assets, then a discharge typically issues in 3–6 months. Chapter 13 plans run 36–60 months; once you complete payments and required education, the remaining eligible debts discharge.
How bankruptcy affects secured loans like mortgages and car loans
- Mortgage: Bankruptcy does not erase a homeowner’s mortgage lien just by dischargeing the debt—unless the property is sold in a Chapter 7 estate or a successful lien stripping/cramdown is approved under Chapter 13 in certain circumstances. You can keep a home if you continue paying or if your plan addresses arrears.
- Car loan: You can reaffirm, surrender, or leave the car and let the lender repossess it. In Chapter 13, you may be able to reduce the principal balance on certain assets (subject to the 910-day rule for vehicles) or cure arrears over time.
Credit-report and post-bankruptcy expectations
- Public record and reporting: A Chapter 7 discharge typically remains on credit reports for up to 10 years; Chapter 13 appears for up to 7 years from filing. Negative entries for discharged accounts may persist—but you are no longer personally liable.
- Rebuilding credit: Start by establishing small, on-time payments (secured cards, credit-builder loans), tracking budgets, and avoiding new high-cost debt. Many clients can qualify for credit within a year or two with disciplined habits; mortgages are available to former filers after waiting periods set by lenders and programs.
Common misconceptions and mistakes to avoid
- Mistake: Expecting every debt to disappear. Student loans, recent tax debts, child support, and many government claims typically survive bankruptcy.
- Mistake: Thinking bankruptcy instantly fixes credit. Filing shows up as a public record and can lower your score initially; responsible behavior afterward drives recovery.
- Mistake: Skipping attorney review. Small errors or missed exemptions can change outcomes. In my practice, even clients on tight budgets benefit from at least a consultation to weigh options.
When to consider alternatives
Bankruptcy isn’t the only tool. Consider negotiating settlements, debt management plans through a reputable credit counseling agency, or targeted loan modifications for mortgages. The Consumer Financial Protection Bureau provides helpful overviews of options (CFPB).
Key sources and where to check current rules
- U.S. Courts — Consumer bankruptcy basics and the automatic stay: https://www.uscourts.gov/ (see consumer bankruptcy pages).
- Consumer Financial Protection Bureau — Guides on bankruptcy and credit: https://www.consumerfinance.gov/.
- Internal Revenue Service — Rules on tax discharge in bankruptcy: https://www.irs.gov/.
- National Consumer Law Center — Practical analyses of cramdowns, nondischargeable debts, and consumer protections.
Internal resources
For deeper reading on chapters and specific protections, see these FinHelp guides:
- Chapter 7 explained: Chapter 7 Bankruptcy Explained (https://finhelp.io/glossary/chapter-7-bankruptcy-explained/)
- Chapter 13 explained: Chapter 13 Bankruptcy Explained (https://finhelp.io/glossary/chapter-13-bankruptcy-explained/)
- Automatic stay basics: Bankruptcy Automatic Stay (https://finhelp.io/glossary/bankruptcy-automatic-stay/)
Professional tips
- Get counseling early: Credit counseling is required and can also surface alternatives to bankruptcy.
- Inventory assets and exemptions: State exemptions determine what you can protect; a review before filing avoids surprises.
- Keep documentation: Provide income, tax returns, bank statements, and loan documents promptly to your attorney or trustee.
- Watch deadlines: Timely filing of schedules, plan payments, and required education sessions matters.
Limitations and disclaimer
This article provides educational information—not legal advice. Bankruptcy outcomes depend on the Bankruptcy Code, local rules, case law, and your personal situation. In my practice, I prioritize a full review before advising a filing. Consult a qualified bankruptcy attorney licensed in your state to analyze options, confirm current dollar limits, and prepare filings.
Bottom line
Bankruptcy can eliminate many unsecured loans and give structured ways to handle secured debts, but it is not a universal wipeout. Understand which loans are dischargeable, the trade-offs of Chapter 7 vs. Chapter 13, and the procedural steps to protect assets and rebuild credit. Use the linked resources above and a licensed attorney to make an informed choice.