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What loans can be part of bankruptcy?

On Behalf of | Nov 30, 2020 | Personal Bankruptcy

When a debtor in Durham, NC, can no longer pay debts, bankruptcy gives them an option to legally erase debts. The two common types of bankruptcy include Chapter 7 and Chapter 13. Chapter 7 liquidates non-exempt assets to pay creditors while Chapter 13 restructures debt in manageable payments. Not all debt can be discharged, but certain loans may get discharged.

Debts Under Bankruptcy

Most debts discharged in bankruptcy include unsecured loans or debt because the lender didn’t require collateral to secure it. For example, a mortgage uses the home as collateral to back the loan. If the debtor fails to pay, the lender can foreclose on the home. Under Chapter 13, unsecured debts cannot be discharged.

Some secured debts may be dischargeable under Chapter 7. However, it doesn’t invalidate the lien, and the debt will likely have to turn the property over to the lender. If the debtor got the loan under fraudulent intentions, the loan may not get discharged. For example, if a debtor falsely reported more income on purpose to qualify for the loan, that would be considered fraud.

Student Loans

Student loans are commonly hard to discharge in bankruptcy. To get a student loan discharged, the debtor has to file a claim saying repaying the loan would cause an undue hardship. .

The court decides whether or not to discharge the loan under an adversary proceeding. However, a creditor could challenge the motion to discharge.

Cash Advances

Cash advances take out 70 days prior to the bankruptcy for non-essential items exceeding $1000 seldom qualify for a discharge as of 2019. It also applies if a debtor paid another otherwise dischargeable debt with another loan.

These rules apply because it presumes the debtor had no intentions of repaying the loan and may attempt to discharge it in court. Even if the debtor took out a cash advance loan prior to the 70 days, the credit card company can still challenge it when they suspect fraud.

While bankruptcy gives debtors a fresh start, laws can be complex. Seeking legal assistance may help prevent cases from getting dismissed.


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