Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Apr 23, 2012

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There’s a common misconception that personal loan debt is wiped away or “frozen” when a borrower goes to jail. Unfortunately for those serving time, that’s not the case.

Most personal loans contain no provisions or protections for borrowers in the event they’re found guilty of a crime and sentenced to serve time in jail. Instead, lenders still expect payment from jailed borrowers. If those payments do not occur, then a lender will report the default to credit rating bureaus—which will result in a credit score ding for the borrower—and turn the debts over to  collections agencies.

The collections agency will then pursue repayment through whatever means they must. Often times, when a borrower is in prison, collectors will receive a court ordered judgment allowing either wage garnishment or repossession of whatever the personal loan was used for.

For example, on mortgages the property would be reclaimed and foreclosed on by the lender.

Automobiles secured by a personal loan will be repossessed and auctioned in order to compensate lenders for their money.

Kitchen appliances would suffer a similar fate.

To avoid this, borrowers who are sentenced to serve time in jail would be wise to establish an automatic repayment plan with their personal loan lender. Many lending services have online systems set up for automatic payment that could prove to be wonderful tools in a situation such as this.

Another option for prisoners is to speak with an outside friend or family member who can manage and maintain the prisoner’s monthly payments.

After all, a borrower being released from jail has a difficult enough time acclimating themselves to the free lifestyle in normal society. That acclimation process will only be amplified if a prisoner finds all of his or her possessions missing upon returning home.