Most people talk about loan debts in terms of whether they are considered “secured” or “unsecured” debts. However, there are some loans hold either of these titles but are handled very differently from a traditional type of debt.
There are two big distinctions in personal loans: (1) bank loans/lines of credit and (2) title/payday loans. A bank loan or line of credit may be considered an unsecured debt, but will most likely be required by the court to be repaid. This means the debtor may not be eligible to have these debts eliminated in a Chapter 7 case, but instead repay the debt in Chapter 13.
Title and payday loans can greatly complicate the bankruptcy process. These loans are generally considered to be secured debts, because they hold rights to the debtor’s car or paycheck as collateral. However, the court may determine that the original lien holder’s rights outweigh the rights of the title loan lender, allowing the debts to be eliminated in Chapter 7 rather than requiring them to be repaid.
Quickly becoming one of the largest sources of debt among Americans under the age of 30, student loans pose unique challenges in the bankruptcy process. Generally considered to be an unsecured debt, they are required by law to be repaid. This means that they are rarely eligible for bankruptcy, leaving the debtor to resolve these debts directly with the lender or through a debt consolidation program. In the rare case the bankruptcy court does allow student loans to be eligible for bankruptcy, they are typically handled in a Chapter 13 repayment plan.