Can Personal Loans Be Discharged in Bankruptcy? A Lawyer’s Guide

Many debtors believe that a discharge of personal loans in bankruptcy is automatic. However, while unsecured debts are typically eligible for elimination, the timing of your filing and the original purpose of the funds are critical. In this guide, I will share the legal strategies necessary to protect your filing and ensure your personal loan is successfully wiped out in your bankruptcy case.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Updated on January 27, 2026.

Listen: The Professor’s Audio Briefing.

Key Takeaways: Discharging Personal Loans & Bankruptcy

• Personal Loans are Generally Dischargeable: As unsecured debt, personal loans are typically wiped out in Chapter 7 bankruptcy or discharged after a Chapter 13 plan has been completed.
• The 90-Day “Red Flag” Zone: Loans taken out or large payments made to creditors within 90 days of filing are subject to intense scrutiny by the bankruptcy trustee.
• The “Paper Trail” is Your Best Defense: If you used a personal loan to consolidate high-interest credit cards, keep every receipt. Proving the loan was used for debt restructuring rather than luxury spending is the key to a smooth discharge.
• Strategic Delaying Saves Cases: When “bad” debt (like luxury purchases) is involved, the most effective lawyer’s strategy is often to delay the filing. Making minimum payments for 6–12 months can move the debt outside the window of presumptive fraud.
• Be Honest with Your Bankruptcy Attorney: Your attorney cannot protect you from what they don’t know. Disclose all recent loan applications, cash advances, and “private” loans from friends or family during your initial audit.

Understanding the Nature of the Debt

Personal loans are typically unsecured debt, placing them in the same category as medical bills and credit card balances. Unlike a mortgage or an auto loan, no collateral is attached to the note. In a standard Chapter 7 liquidation, these are among the first debts to be discharged, assuming the debtor’s conduct leading up to the filing passes the “smell test” of the bankruptcy trustee.

Consolidating Debt with a Personal Loan Can Be A Double-Edged Sword

Consolidating high-interest credit cards (e.g., 22% APR) into a single personal loan with a fixed interest rate, such as 10% APR, can be a savvy financial move.

As the table below illustrates, the savings are mathematically significant:

Debt Type	Balance	Interest Rate	5-Year Interest Cost
Credit Cards	$10,000	22%	$6,571.35
Personal Loan	$10,000	10%	$2,748.23
Net Savings			$3,823.12

While consolidating debt financial responsibility, doing it too close to a bankruptcy filing can trigger a “red flag” for the trustee.

The “Look-Back” Period and Presumptive Fraud

The Bankruptcy Trustee will review transactions, whether payments to creditors or purchases made shortly before filing. Under 11 U.S.C. § 523(a)(2)(C), consumer debts owed to a single creditor totaling more than a certain threshold for “luxury goods or services” within 90 days of filing are presumed to be non-dischargeable.

This is covered in the Statement of Financial Affairs in the bankruptcy petition. Note that a critical error bankruptcy attorneys make is that they guide themselves by the dates listed in the Statement of Financial Affairs, although trustees regularly go past that time period, especially when allowed under state law.

To learn more about completing the Statement of Financial Affairs, please feel free to read this article and the accompanying YouTube video.

Case Studies Based on Former Client’s Situation

I once represented a client who took out $28,000 in personal loans just three months before filing. Usually, this would invite an immediate objection from the trustee. However, I  successfully argued two points:I once represented a client who took out $28,000 in personal loans just three months before filing. Usually, this would invite an immediate objection from the trustee. However, I  successfully argued two points:

1. Traceability: I proved every dollar was used to pay off existing high-interest credit card debt (shifting debt, not creating new debt).
2. Change in Circumstances: The client lost his livelihood due to unforeseen economic shutdowns during the coronavirus pandemic.

Contrast this with a client who used a personal loan for elective plastic surgery and sought to file immediately. In the eyes of a Chapter 7 trustee, this is “loading up” on debt with no intent to repay, a sign of bankruptcy fraud.

The “Delay” Strategy: When Patience is a Legal and Financial Virtue

If a client has “bad” recent debt such as recent luxury spending or cash advances, filing immediately is a mistake. In my experience as a bankruptcy law attorney, I offer two easy  solutions:

The Chapter 13 Pivot: If the client must file now, they may need to enter a 100% repayment plan. This ensures creditors are made whole over 3–5 years. The Standing Trustee isn’t likely to object since creditors are paid back.

The 12-Month Cooling Period (Maybe More): If Chapter 7 is the only viable path, the best strategy is often to delay filing. By making minimum payments for 12 months or more, depending on the case, the debtor demonstrates a “good faith” effort to repay, moving the transaction outside the immediate window of suspicion.

The Golden Rule: Honesty is the Best Policy

A bankruptcy trustee’s job is to be a professional skeptic. The trustee’s job is to protect the bankruptcy estate on behalf of debtors. I have maintained a clean record of successful discharges because I perform a “pre-audit” of every client. I make it clear to my clients that it’s better I know the truth now, versus finding out at the 341 Meeting of Creditors.

The Professor’s Final Thought

Bankruptcy is a powerful tool for a fresh start, but it is a “court of equity.” To receive equity, one must act equitably. Be honest with your bankruptcy attorney. Trust me, eventually the trustee will find out, so it’s better if your lawyer knows first.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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