Personal loans are unsecured debt. Often given by family members or friends, the borrower may feel a particular obligation to the lender and wish to make a particular effort to repay the loan.
In cases of financial difficulty – and a bankruptcy filing – the court insists on equal treatment of creditors. If a personal loan is paid back just prior to a Chapter 7 bankruptcy filing, the court may attempt to recover the repaid funds from the family member or friend, claiming them for the pool from which all creditors are repaid in bankruptcy. A borrower taking such an action may subject himself to higher payments in his Chapter 13 payment plan and otherwise less favorable treatment from the court.
If you’ve taken a personal loan, don’t repay it if you anticipate you might need to do a bankruptcy filing, unless you’re making equal payments to your other creditors.
The court requires that all debts, including personal debts, be disclosed. This is for the protection of the borrower as well as all of his creditors. In a bankruptcy, the court’s responsibility is to distribute liquidated assets evenly among the creditors without special favor. If a personal debt is not declared in a bankruptcy, the borrower may sue to recover afterwards, claiming it was not covered in the bankruptcy settlement, and may obtain a judgment for the full amount.
The borrower may wish to repay personal loans that have been discharged in bankruptcy. He has the option to do so after bankruptcy is completed.