When financial struggles make it impossible to keep up with loan payments, bankruptcy can offer a path to relief. However, many people are unsure how personal loans and payday loans are treated in this process. Understanding the distinction between secured and unsecured debt is key to knowing what bankruptcy can and cannot eliminate.

How Personal Loans Are Treated in Bankruptcy

Personal loans are generally unsecured debts, meaning they are not tied to any specific property, such as a car or home. In both Chapter 7 and Chapter 13 bankruptcy, unsecured debts are typically dischargeable — meaning they can be wiped out.

• Chapter 7 Bankruptcy: If you qualify, your personal loans can be fully discharged after liquidating non-exempt assets (though many filers keep most or all of their property through exemptions).
• Chapter 13 Bankruptcy: Instead of immediate discharge, you make payments under a 3- to 5-year repayment plan. Any remaining personal loan balance may be eliminated at the end of your plan.

What About Payday Loans?

Payday loans are also considered unsecured debts and are usually dischargeable in bankruptcy. However, lenders sometimes challenge these debts, claiming fraud if the borrower took the loan knowing they could not repay it. In such cases, the court will determine whether the debt should be discharged based on the circumstances.

If you took out a payday loan shortly before filing, the lender might argue it was done in bad faith. Consulting with an attorney before filing ensures you avoid potential disputes.

Rebuilding After Bankruptcy

Discharging payday and personal loans can relieve immediate financial pressure, but rebuilding credit is an important next step. Paying ongoing obligations on time, maintaining a budget, and using credit responsibly can help restore your financial standing over time.

At Grafstein & Arcaro, LLC, we can provide legal assistance to the Connecticut public. Our attorneys can guide you through the bankruptcy process and help you understand which debts can be discharged to give you the best possible financial restart.