How Are Debt Consolidation Loans Handled In Bankruptcy?

How Are Debt Consolidation Loans Handled In Bankruptcy?

Debt consolidation loans are used by many people struggling to pay their bills. Consolidation loans are beneficial because they merge many different debts into one, lower your interest rate, and allow you to make one easy payment to pay off your debts. However, sometimes you are unable to pay off a debt consolidation loan no matter how hard you try, and, because of this, you’re forced to file bankruptcy. Let’s take a look at how debt consolidation loans are treated in bankruptcy.

Unsecured Debt

If you used your debt consolidation loan to pay off credit card debt, that loan will be treated as an unsecured debt, which means you may be able to discharge it in bankruptcy.

Student Loans

student-loan-price-tagIf your debt consolidation loan was used to pay off student loans (including private loans) you may not be allowed to discharge that debt in bankruptcy. Because the debt consolidation loan was used to pay off your student loans, the new loan will be considered “educational debt” and fall under the strict bankruptcy rules that state that you can’t discharge educational loans unless you can prove that paying them will cause undue hardship.

Mixed Use Loans

Some debt consolidation loans are used to pay off both student loans and other unsecured debt such as a credit card. In that case, depending on your circumstances, you may be allowed to discharge the loan. You’ll need to discuss the issue with your bankruptcy attorney.

Bad Faith

It’s important that debtors use caution with debt consolidation loans because “bad faith” rules also apply to this type of debt when filing bankruptcy. If you took out a debt consolidation loan in bad faith—with no intention of repaying it—you could be denied a bankruptcy discharge. For example, the bankruptcy court might decide your actions are in bad faith if you file bankruptcy only a few months after taking out the loan.

If you have a debt consolidation loan you’re struggling to pay and think you may need bankruptcy, talk to a bankruptcy attorney today.