Understanding Secured and Unsecured Debts in Bankruptcy
If you are struggling with overwhelming debt, bankruptcy is one of the options that may offer you relief. Bankruptcy provides individuals or businesses unable to repay their debts with a way to wipe out or restructure their debts. If you are considering bankruptcy, it is crucial to understand the difference between secured and unsecured debts. These two types of debts impact how your obligations are treated during bankruptcy. Below, we discuss the difference between secured and unsecured debts and how these two categories of debts are treated in bankruptcy.
Understanding Secured Debts
Secured debts are those that are guaranteed by collateral. Collateral is a specific piece of property or item that the lender can claim if the debtor cannot pay back the debt. Secured debts reduce the risk to lenders. A common example of secured debt is a mortgage. When a person takes a loan to purchase a house, the loan is secured with the home the loan is used to buy. If a borrower defaults on the loan, the lender can foreclose on the property to satisfy the debt. Other common examples of secured debts include auto loans, secured credit loans, and home equity lines of credit.
Understanding unsecured Debts
Unsecured debts differ from secured debts in that they are not backed by collateral. With unsecured debts, lenders generally provide credit to borrowers based solely on their creditworthiness and promise to repay. There is nothing for the lender to repossess if the borrower defaults. One of the most common examples of unsecured debts is credit card debt. If a borrower fails to make credit card payments, the card issuer can’t repossess the items purchased using the credit card. However, lenders have options for recovering the money. Other examples of unsecured debts include medical bills and student loans.
How Are Secured and Unsecured Debts Treated in Bankruptcy?
Secured and unsecured debts are treated differently in bankruptcy. Secured debts can be discharged in bankruptcy. However, the discharge only eliminates your personal obligation to repay the debt. The lender can still repossess the collateral. For example, if your home loan is discharged, the lender can repossess your house. With Chapter 7 bankruptcy, you have three options;
- Surrendering the collateral and having the debt discharged
- Reaffirming the debts, which means you agree to continue or start making payments to keep the collateral
- Redeeming the property, which entails paying the current value of the collateral in a lump sum and charging the remaining debt. This option is rarely used.
In Chapter 13 bankruptcy, you can include your secured debts in your repayment plan. However, the lien on the collateral remains unless you pay off your debt fully.
Most unsecured debts are discharged in Chapter 7 bankruptcy. However, debts like child support and student loans are exceptions. In Chapter 13 bankruptcy, unsecured debts are part of the repayment plan, but you may only pay a portion depending on your financial situation. Any remaining unsecured debts are discharged at the end of the repayment period.
Contact Our Deerfield Beach Bankruptcy Lawyer
For legal help, contact our skilled Deerfield Beach bankruptcy lawyer at the Law Office of Adam I. Skolnik P.A.
Source:
law.cornell.edu/wex/secured_debt
