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Secured and Unsecured Debt and Why it Matters in Bankruptcy

On Behalf of | Apr 28, 2019 | Bankruptcy Basics

If you are in debt and are considering filing bankruptcy, one of the main questions on your mind is likely whether the bankruptcy will discharge (eliminate) your debt. The answer depends heavily on whether your debt is secured or unsecured. Having a basic understanding of how each type of debt is treated in bankruptcy can help you decide whether bankruptcy is right for you and which type of bankruptcy you should file.

Types of Debt

Secured Debts:
Secured debts are debts where your promise to repay is secured by the pledge of collateral. With secured debts, if you fail to keep up with the payments, your creditor can take back the collateral securing the debt. Mortgage and car loans are common types of secured debt. For example, your mortgage is secured by your home. If you default on your loan, the lender can sell your home to repay your debt.

Once the creditor has taken back the collateral through mortgage foreclosure or car repossession, your property is sold to pay the unpaid portion of the debt. If the price at which the collateral is sold does not fully cover what you owe on the debt, the creditor may have the right to sue you for the remaining amount (called the deficiency).

Unsecured Debts:
With unsecured debt, there is no collateral securing your repayment. Because of this, your creditors normally may not take any property if you fall behind. Instead, they typically must file a lawsuit against you and win before they can initiate collection proceedings, which can include wage garnishment and bank levy. Common unsecured debts include credit cards, medical bills, rent and personal loans.

What Happens to Each Type in Bankruptcy?

Chapter 7

Each debt type is treated differently, depending on the type of bankruptcy filed. If you file Chapter 7, most of your unsecured debts are wiped out. Debts that cannot be discharged in bankruptcy include child support, student loans (with some exceptions), and many types of tax debts.

While Chapter 7 eliminates the obligation to pay a secured debt, it does not eliminate the creditor’s lien that allows for the collateral, such as your house or car, to be retaken and sold. Because of this, if you would like to keep the collateral, it is vital to stay current on the payments of your secured debts.  However, if you would like to surrender the collateral instead of keeping it, Chapter 7 can protect you from being sued, if the collateral later sells for less than the debt amount.

Chapter 13

During Chapter 13, most unsecured debt becomes part of the 3 to 5 year repayment plan. The amount the law requires you to pay towards the unsecured debts is the same that you would have had to pay in a Chapter 7, which is usually nothing. Therefore, most unsecured debts are discharged at the end of Chapter 13 after little or nothing has been paid towards them.

A Chapter 13 allows you 3 to 5 years to become current on your delinquent secured debts through the payment plan. This is why Chapter 13 bankruptcy is especially helpful for those seeking to avoid repossession or foreclosure. As long as you make the agreed monthly payment towards your delinquent secured debt under the plan, and maintain current on your payments, your creditors are legally prohibited from taking back the collateral.

Talk to an Attorney to Protect You

We are bankruptcy lawyers who know how to make a difference in your financial situation. We have experience you can rely on and we care about your results. Contact our New Jersey law firm online by filling out the form or by calling 973-323-2953 to schedule a free initial consultation with an attorney at Levitt & Slafkes, P.C..

We are proudly designated as a debt relief agency by an Act of Congress.  We have proudly assisted consumers in filing for Bankruptcy Relief for over 30 years. The information on this website and blogs is for general information purposes only.  Nothing should be taken as legal advice for any individual case or situation.