How Personal Loans and Bankruptcy Work: Tips and Strategies
Welcome to another podcast episode. Today’s topic is personal loans and bankruptcy. We’ll go over a couple of issues with personal loans, including credit cards, to better understand how they work and could affect a bankruptcy case.
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The Benefits of Personal Loans
Personal loans could be a good way to save money, especially when consolidating debt, such as with credit cards. If you consider the average interest rate on credit cards to be in the neighborhood of 29%, personal loans could easily be half of that.
When I built my steel shed garage, I got a personal loan to pay for it. Of course, the garage is a requirement. I need that man cave. Not only do I need it, I deserve it 😉Where else will I put all my tools? For the record, I build pretty cool stuff. Upcycling has become a minor addiction.
Now, in my case, I’m paying, I believe, 12% on the loan. Imagine if that debt of approximately $15,000 was at 29%. That would hurt. But that’s why I recommend that before you get a personal loan or transfer the balance of other credit cards, use an online calculator where you can calculate monthly payments and interest. That way, you can see the difference, especially what you would pay over the life of the loan. You will see how substantial the difference is.
So, consider a personal loan a good way to save money and consolidate debt. Another important factor to consider is that anybody can get a credit card. There is no shortage of cards for those with bad credit. For example, a secured credit card would help build up credit and increase your credit score. I’ve mentioned this in numerous blogs since I’ve been in that situation.
How I Rebuilt My Credit with a Personal Loan
For example, if you give the bank $500 for a secured credit card, the bank already has your money. So, there’s no issue in getting approved. I did the same thing with a personal loan.
I settled a personal injury case and used my attorney’s fees to open a new account with the bank, then asked for a loan on that money. It helped me build up my credit over time, especially after foreclosure. However, credit cards are easier to get than personal loans, also known as installment loans. Think of car loans and mortgages and how hard those loans can be to get approved for.
So, if you have the opportunity to consolidate your debt with an installment loan, consider it. Just make sure to run the numbers to confirm they make financial sense. Now, like always, there’s a catch.
Suppose you’re doing the right thing. You’re trying to save money, and then all of a sudden, an emergency occurs. Now, you go back to your credit cards since they have a zero balance, thanks to your personal loan. Say you have $10,000 in available credit, which will help you through this emergency, another bump in the road in the game of life. But unfortunately, you now have $10,000 more in credit card debt, plus the personal loan. This could be a recipe for financial disaster if you can’t afford to pay back both.
So, keep in mind that one problem with a personal loan is with an available balance on credit cards; whether an emergency or temptation, using those credit cards could result in further financial issues and falling into that debt trap all over again.
Personal Loans and Bankruptcy
The first issue is that people believe personal loans can’t be eliminated in bankruptcy. But as I continually stress, don’t take legal advice from a non-lawyer.
The issue is more about timing. For example, do you owe $20,000 in credit cards and consolidate the debt with a personal loan, but three months later, maxed out your credit cards? If you are filing for bankruptcy soon, that could be a problem. But the facts are important.
For example, why is there another $20,000 in debt? Did you take a river cruise (I wish, I’ve never been on one)? If so, that won’t work unless a Chapter 13 bankruptcy is filed and that debt is paid back. Or delay filing for bankruptcy by a year or more.
Did you pay down your mortgage? That could also be a problem. What if you have medical bills, and with the hospital threatening you with a lawsuit, you get a personal loan to pay them off, and two weeks later, you file for bankruptcy? That’s not likely an issue for you, although without getting into the weeds, it’s probably an issue for the hospital. There’s a good chance the bankruptcy trustee will sue the hospital to recoup the funds.
But you see the difference. It’s medical bills, not a Rolex, luxury trip, or kitchen remodeling. The key factors are timing and what the loan proceeds were spent on. If it could be an issue for the bankruptcy trustee, then the answer is delay, delay, delay.
Strategies with Bankruptcy and Debt Management
It’s common for bankruptcy lawyers to advise clients to file in a year or more while making minimum payments. That’s usually all that’s needed to avoid issues with the bankruptcy trustee. But again, it depends on the facts of the case.
For example, one of my clients paid off $20,000 in credit card debt with a personal loan. Two months later, he maxed out his credit cards and filed for bankruptcy shortly after. Why did everything go well in his case (besides the fact that I was his lawyer)? Again, the key is the facts of the case.
My client used a personal loan to pay off his credit cards, but within a few weeks, the COVID-19 pandemic came. He was employed at a restaurant that had to close. Unable to find work during the coronavirus pandemic, he used his credit cards to cover his expenses. Of course, he didn’t buy furniture or luxury items. He just paid his regular household expenses like utility bills.
So, while there are always exceptions, make sure to explain the issue to a bankruptcy lawyer. Explain in detail to your lawyer how the funds over the last few months were spent. Sometimes, delaying the bankruptcy filing by a few months is all that’s needed.
Whether it’s eight months, ten, or twenty months, that depends. We literally make it up. I’m not lying, but that is based on our experiences as bankruptcy lawyers, where we can tell the client in x amount of time. But the important part is telling your bankruptcy lawyer.
I hope this helps out. Good luck as you continue on the path of financial freedom.
Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon Books. To visit my YouTube Channel, click here. To listen to other podcasts, please visit the Archives Page.
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This podcast was transcribed for clarity.
Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.
Updated April 1, 2025.