Can Bankruptcy Erase Personal Debts?


Have you found yourself falling further and further behind on payments that you owe your creditors? Creditors can range from banks and credit card companies to hospitals, schools, physicians, stores and friends. Anyone who has loaned you money is considered to be one of your ‘creditors.’ This simply means that you owe them money.

Most people know that filing for bankruptcy can alleviate a large portion of money owed to creditors (lenders). It’s also a pretty well-known fact that college loans are almost impossible to find relief from at the moment. Medical, credit card and real estate debt can be eliminated or significantly reduced by filing for bankruptcy.

What some people don’t realize is that bankruptcy can help erase personal debts along with those debts owed to a large corporation or credit collection agency. For example, if you borrowed a large amount of money from your grandmother, or other family member or friend, filing for Chapter 7 bankruptcy will most likely eliminate your requirement to repay her. Your grandmother (or other personal lender) must be listed as a creditor in your bankruptcy paperwork in order for this to happen, though.

If you properly list any personal loans in your bankruptcy documentation, those specific debts will usually be discharged along with all of your other outstanding debts. However, this does not mean that you aren’t allowed to pay the person back. Most people, in an effort to maintain happy families and relationships, actually want to be able to repay any of their friends or family members who have loaned them money over the years.

After your bankruptcy proceeding is complete and most, if not all, of your larger debts have been discharged, you will be in a much better place to repay any personal loans that you may owe. Often, lifting all of your major debts will leave you with enough money to pay your bills and get your life back on track. At that time, you will be able to address those personal debts that may still be lingering.

A question was recently raised regarding the use of a family member’s credit cards and whether or not that type of debt could be included on a bankruptcy petition. The answer to that is two-fold. If you simply list that you borrowed money from this person, your responsibility to pay back the debt can be lifted. However, if, for example, your grandmother allowed you to use her credit card – she will still owe the full amount that you charged. You cannot include someone else’s credit card debt on your bankruptcy petition.

Again, after your bankruptcy discharge, you can then turn your attention to repaying any personal debts that may interfere with your personal life. You might want to explain to anyone who loaned you money that you will be able to start paying them back as soon as your bankruptcy case is settled. It is important that you do not repay any personal debts in the 90 days immediately prior to the date of your bankruptcy petition. These payments will be considered ‘preference payments’ by your bankruptcy trustee, and s/he will likely be able to take back (recover) that money in order to distribute payments equally among all of your creditors.


Image credit: Jessica Spengler


3 Responses to Can Bankruptcy Erase Personal Debts?

  1. Great info for a “non-bankruptcy” lawyer like me!

  2. Pingback: Planning to File for Bankruptcy: Can I Still Take a (Pre-Paid) Vacation? | Veitengruber Law

  3. Pingback: Bad Checks and NJ Bankruptcy Law | Veitengruber Law

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