David M. Siegel answers in 37 seconds. Watch on YouTube · Read the transcript.
Short answer: Unsecured personal loans — signature loans with no property attached — are easily eliminated in a Chapter 7. If the loan is secured by a vehicle or other property, we may have to repay it or negotiate something toward it. Most of the personal loans we see are unsecured and go away.
Secured or unsecured is the whole question
Unsecured means that if you stop paying, there is no property the lender can come and take. A signature loan is the clearest example — the lender advanced money against your promise and nothing else. Those discharge cleanly in a Chapter 7.
Secured means the lender holds an interest in something specific. Stop paying and they can take it. Which category a loan falls into determines everything about how it is handled, and it is not always obvious from the paperwork.
How to tell which one you have
Look at what you signed. If the document lists specific collateral — a car, a title, a piece of equipment, furniture — it is secured. If the only thing backing it is your promise to repay, it is unsecured.
Title loans and pawn arrangements are secured by definition. Bank and credit union personal loans are usually unsecured, though credit unions sometimes take a lien on a vehicle or shares. Loans from family are unsecured unless someone filed paperwork, which almost nobody does.
What happens to a secured loan
You have choices. Keep paying and keep the item. Surrender it and discharge whatever balance remains. Or, in a Chapter 13, put the arrears into a plan and catch up over time.
There is one more possibility worth asking about: if the collateral is worth less than the balance, a Chapter 13 can sometimes reduce what has to be repaid to the value of the item. That comes up most often with vehicles bought more than two and a half years before filing.
A note on loans from family
People want to keep paying a relative and stop paying the banks. Understandable, and it needs to be raised with your attorney rather than handled quietly.
Payments to family members before a filing can be treated as preferential transfers, which a trustee may be able to recover — from the relative. Repaying a family loan the month before filing can create the exact problem you were trying to avoid. Nothing about this is a reason not to file. It is a reason to mention it early.
Not sure whether your loan is secured or not?
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Full transcript of the video
what about personal loans in bankruptcy well most personal loans if they are unsecured are easily eliminated in a Chapter 7 bankruptcy case unsecured means if you don’t pay the loan there’s no property attached to it that the creditor can take it’s just a signature loan or an unsecured loan if the loan is secured by either a vehicle or some sort of property then we might have to pay it back or agree to pay back something towards that loan company but most of the debts that we see are often unsecured personal loans that are easily eliminated in a Chapter 7 bankruptcy case
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About the author. David M. Siegel has represented consumer bankruptcy clients in the Northern District of Illinois since 1991 and is the author of several books on consumer bankruptcy. The firm has offices at 790 Chaddick Drive, Wheeling, IL 60090 and 10540 S. Western Ave, Suite 202, Chicago, IL 60643, and handles cases by phone for clients throughout the Chicago area.
This article is general information about Illinois and federal bankruptcy law. It is not legal advice, and reading it does not create an attorney-client relationship. Every case turns on its own facts — speak with an attorney about yours.