In the challenging financial world, uncertainties and unwanted events happen eventually, like sudden job loss, economic turmoil, etc. Debts can be overwhelming in those moments. A way out is filing a bankruptcy.
The question is, can you file bankruptcy on personal loans? Yes, you can file for bankruptcy to avoid any personal loan. But, it has certain procedures and policies. We explain filing a bankruptcy with its pros and cons.
How Filing Bankruptcy Works
Two chapters deal with filing bankruptcy for any personal loan: Chapter 7 and Chapter 13.
Filing Bankruptcy Through Chapter 7
Chapter 7 bankruptcy is the best way to shake off your debts. Upon getting the court’s order based on this chapter, it releases you from the responsibility to pay the borrowed amount through a personal loan. But it comes with some rules.
It is good if you cannot pay your debts regularly and your income is low. And it is even better if you have proof that you cannot pay off the personal loan. You need solid evidence to back your financial calamity to the court. Also, your lawyer’s intervention is crucial in this case.
Chapter 7 is suitable for unsecured loans because they can usually be cleared. As in most cases, personal loans are unsecured. You need not worry about losing any valuable thing. However, a low credit score and specific collateral terms can cause you to lose assets, like a car or piece of land.
Filing Bankruptcy Through Chapter 13
Unlike Chapter 7, filing bankruptcy through Chapter 13 does not release your responsibility from your due personal loan. It acts like a structured repayment plan that lasts three to five years.
Court Review: The court checks all of your documents to gauge your present and future financial condition. Then, it decides how much you pay and what you can afford. However, the court decision also considers how much you owe to the bank or financial institution. Also, whether I should report personal loans on taxes is a common question.
Payment Structure: Moreover, a good part of filing bankruptcy under Chapter 13 is it lets you pay less each month or stretch out the payments over more years. It can make payments easier. Essentially, you must strictly maintain the repayment plan. Failure to do so can allow the lender to take away your collateral.
Chapter 13 Applicability: Filing bankruptcy under Chapter 13 is the best if you cannot prove that you are totally broke. It means Chapter 13 is good if you have a job or any earning source. But the income is much less than your need to cover expenses and other obligatory financial liabilities like paying for child care, alimony, etc. Does Lending Tree help with a personal loan?
How to File a Bankruptcy for a Personal Loan
Below is a stepwise guideline for filing bankruptcy for a personal loan.
Step 1: Collect all your financial documents. It includes income statements, tax returns, credit reports, etc. Do a brief self-assessment to get the actual scenario.
Step 2: Appoint a lawyer. In this case, it can be termed a “Credit Councellor.”
Step 3: Fill out the bankruptcy form with the lawyer’s help. We suggest you carefully read all the terms and clauses mentioned. Just do not follow your lawyer; use your thinking also. And consult with him or her before filling out each point.
Step 4: Now, you must arrange the fees to file for bankruptcy. To file bankruptcy under Chapter 7, the fee is $338.
Step 5: Cross-check the filled-out bankruptcy form before submitting it. Also, ensure that you or your lawyer has enclosed required documents like paychecks, any required local form, fee waiver request, etc., as applicable.
Step 6: Now, go to the local court to file for bankruptcy. However, in general, your lawyer is responsible for doing that. You must collect the respective bankruptcy case number, details of your bankruptcy trustee, and the meeting details, like the date and time of the meeting with the trustee.
Step 7: Sometimes, you or your lawyer must mail your bankruptcy file. If required, ensure to do that.
Step 8: Attend the meeting with your trustee. The meeting is usually called “341 Meeting.”
Step 9: Finally, you get the court decision and follow it accordingly.
So, can you file bankruptcy on personal loans? We are hopeful that you have a practical answer. You can claim bankruptcy via two particular chapters to get a court decision in your favor. However, we must inform you that the bankruptcy hearing can go on for several months.
We highly recommend you not expect it to finish within one or two weeks after only a few hearings. Also, top financial advisors in the USA suggest you get a good and experienced financial lawyer. This move will get the court decisions in your favor. Moreover, what is a good APR for personal loans?