Can Personal Loans Be Relieved in Bankruptcies in New Jersey?

1. Introduction: Why It Matters

Mounting personal loan debt can quickly spiral, especially if you lose your job, fall ill, or experience financial emergencies. When you can’t keep up, the stress can feel overwhelming—calls from debt collectors, fear of sources, and the lurking threat of legal action. For many New Jersey residents, one legal solution is bankruptcy, particularly Chapter 7 or Chapter 13.

This guide seeks to answer a common question: Can personal loans—those unsecured debts—be discharged in bankruptcy in New Jersey? The short answer: Yes, often—but it’s not automatic. The answer depends on factors like loan type, income level, timing, and structure of the bankruptcy filing. In this comprehensive guide, we’ll walk through everything you need to know.

2. Understanding Personal Loans

What Is a Personal Loan?

Unsecured debt: No collateral (like a house or car) backs the loan.
Various purposes: Debt consolidation, medical bills, major purchases, or emergencies.
Typical terms: 2–7 years repayment, fixed or variable interest rates.
Monthly installments: You repay principal + interest over time.

Why it matters: Since there’s no collateral, personal loans are prime for discharge in bankruptcy—but lenders may still aggressively collect through legal means.

3. Overview of Bankruptcy in New Jersey

Federal Nature, Local Courts

Bankruptcy is governed by federal law (Title 11 of the U.S. Code), but filings occur in New Jersey’s federal bankruptcy courts:

Camden (District of NJ–Camden)
Newark (District of NJ–Newark)
Trenton (District of NJ–Trenton)

Main Types of Personal Bankruptcy

Chapter 7 – Liquidation
- Non-exempt assets are sold; proceeds go to creditors.
- Most unsecured debts—including personal loans—are discharged.
- Some assets may be protected by NJ and federal exemptions.
Chapter 13 – Reorganization/Repayment
- You keep your property but repay debts over 3–5 years via a court-approved plan.
- Remaining dischargeable debts are wiped out at plan’s end.
- Allows you to catch up on secured debts (mortgages, car loans).

4. Chapter 7: Liquidation and Discharge

How It Works

Means Test: Determines eligibility via comparing your income to NJ median.
- Pass means test → file Chapter 7.
- Fail → typically filed under Chapter 13.
Automatic Stay: Creditors—including personal loan lenders—must stop collection once you file.
Asset Assessment: Exempt assets (e.g., clothing, tools, some retirement) stay with you; non-exempt may be liquidated.
Debt Discharge: Qualifying unsecured debts (like personal loans) are typically fully discharged ~3–6 months after filing.

What Gets Discharged?

Qualifying debts: unsecured personal loans, credit card charges, medical bills.
Student loans: dischargeable only in rare ‘undue hardship’ cases—hard to obtain.
Taxes, fines, fraud-related debts: certain debts may not be dischargeable.

For Personal Loans

Yes—unsecured personal loans are almost always dischargeable under Chapter 7, provided:

The loan wasn’t obtained fraudulently.
You’re the primary borrower (loans with co-signers may involve them—see section 7).
You qualify (means test).

5. Chapter 13: Repayment Plans and Partial Discharge

Not everyone qualifies for or prefers Chapter 7. In Chapter 13:

You propose a 3–5-year plan to repay all or part of your debt.
You can catch up on secured loans while consolidating unsecured debt.
After successful plan completion, dischargeable balances—including personal loans—get canceled.

Why Choose Chapter 13?

You exceed income limits for Chapter 7.
You want to save a home under foreclosure or restructure debts.
You prefer to make steady payments vs. liquidating assets.

What About Personal Loans?

They fall under Class B or Class C unsecured debts. You can repay them partially or not at all, depending on disposable income and plan specifics. Whatever remains makes you debt-free after discharge.

6. Exceptions & Limitations

Fraudulent Loans

If you lied on your application or misrepresented your situation, the lender can object.
After a trial-like process, the court may:
- Deny dischargeability.
- Require full repayment.

Timing and Documentation

Loans made 60+ days before filing are eligible.
Loans acquired shortly before filing can be scrutinized.
Always document loan purpose, records, and legitimacy to avoid disputes.

7. Will Co‑Signers Be Impacted?

Yes—if you have a co-signer:

Your filing stops your personal obligation.
Their liability remains unless they also file bankruptcy or the debt is discharged via your filing under a joint plan.

Co-Signer’s Risks

The lender may pursue the co-signer for full repayment.
If co-signer files in NJ too, they may discharge the debt—subject to similar rules.

8. Filing Requirements & Eligibility

Chapter 7

Means Test: Compare your NJ household income to the federal median.
- Below median → qualify.
- Above → may not.
Credit Counseling: Required within 180 days before filing.
Macroeconomic conditions: Recent changes may impact the test.

Chapter 13

No strict means test—but:
- You need stable income.
- Monthly plan payments must cover specific priority items.
- Debt limits apply ($2,750,000 combined secured + unsecured; subject to periodic changes).

9. Step-by-Step Bankruptcy Process in NJ

Consultation with an Attorney
- Evaluate eligibility.
- Analyze debts, assets, and goals.
Credit Counseling Session
- Took place before filing.
Preparation & Filing of Petition
- Includes schedules, statement of financial affairs, means test.
- Filed at your local U.S. Bankruptcy Court (e.g., Newark, Camden, Trenton).
Automatic Stay Activated
- Creditors can’t contact you or pursue lawsuits.
Appointment of Trustee
- Reviews assets, claims, and plans.
341 Meeting of Creditors
- Brief hearing (often in-person or via phone).
- Trustee and creditors can ask questions.
(For Chapter 13) Confirmation Hearing
- Judge approves or rejects your repayment plan.
Make Plan Payments (if Chapter 13)
- Trustee distributes to creditors.
Complete Debtor Education Course
- After filing, before discharge.
Receive Discharge Order

Personal loans and other eligible debts are forgiven.
Court sends a formal Discharge Order.

Case Closure & Notice to Creditors

Enforcement of discharge begins.

10. Costs and Timeline

Fees

Court filing fee
- Chapter 7: ~$338
- Chapter 13: ~$313
Attorney fees vary by complexity, region, Chapter type.
- NJ typical range:
  - Chapter 7: $1,500–$3,000
  - Chapter 13: $3,500–$6,000 (includes plan representation)

Timing

Chapter 7: ~90–180 days from filing to discharge.
Chapter 13: 36–60 months of payments, discharge after plan completion.

11. Credit Impact & Recovery

During Bankruptcy

Filing stays on credit reports:
- Chapter 7: 10 years.
- Chapter 13: 7 years from filing.
Score damage is significant, but…

After Discharge

Rebuilding credit:
- Work with lenders offering secured credit cards and small installment loans.
- Pay bills on time.
- Keep utilization low.
Clean slate allows financial discipline and rebuilding from the ground up.

12. Alternatives to Bankruptcy

If bankruptcy isn’t for you, options include:

Debt Settlement or Negotiations
Debt Consolidation Loans (caution: they add more debt)
Credit Counseling & Debt Management Plans (DMPs)
Informal Extensions or Hardship Plans with lenders
Refinancing for major debts
Paying Over Time with a CPL or Co‐Signer

While useful, these don’t always eliminate debt as effectively as bankruptcy.

13. Tips for Choosing an Attorney or Counselor

Specialization in NJ bankruptcy law.
Experience and track record, especially with unsecured debts.
Fee transparency—clear pricing, no surprises.
Client testimonials—ask for references or check online reviews.
Communication—should be responsive and informative.
Local presence—NJ courts/local knowledge matters.
Ethical stance—avoid unscrupulous “debtor mills.”

14. Real‑Life Examples

Case 1: Chapter 7 Discharge

Situation: Single mother of two in Newark with $25,000 of personal medical loan debt.
Outcome: Filed Chapter 7, qualified via means test, had no non-exempt assets, received discharge in 4 months. All $25k personal loan debt wiped out.

Case 2: Chapter 13 Repayment

Situation: Dual-income couple in Camden behind on mortgage and car loan, plus $40,000 in unsecured balances.
Outcome: Filed Chapter 13, 60-month plan awarded. Paid off half of unsecured loans; rest discharged at end.

Case 3: Discharge Denied Due to Fraud

Situation: NJ resident filled credit card to buy non-essential items knowing bankruptcy filing was imminent.
Outcome: Lender objected citing “presumed fraudulent” acquisitions. Court denied discharge on $10k of that debt—only the rest was wiped out.

15. Final Thoughts & Summary

Yes: Unsecured personal loans can generally be discharged in bankruptcy in New Jersey.
Chapter 7 = Full discharge for qualified filers. Quick route (3–6 months).
Chapter 13 = Structured repayment, with remaining balances discharged later.
Exceptions apply for fraud and co-signers.
Preparation matters: gather records, credit counseling, eligibility tests, attorney help.
Bankruptcy impacts credit short‑term, but recovery is possible through smart post-discharge strategies.

Next Steps

Assess your situation: list debts, income, assets.
Get free or low‑cost legal advice via NJ local bar association or legal aid.
Avoid scams—only licensed and ethical practitioners.
Start credit‑counseling session to prepare for the filing process.

FAQs – Quick Hits

Q: Can I discharge a co-signed personal loan?
A: Only if your co-signer also discharges the debt or it’s full within a joint Chapter 13 plan.

Q: Will bankruptcy protect me from wage garnishment in NJ?
A: Yes—filing triggers an Automatic Stay halting wage garnishment until discharge is granted.

Q: Can I rebuild credit quickly after bankruptcy?
A: Absolutely—many begin rebuilding within a year via secured credit cards, timely payments, and conservative credit use.