How Bankruptcy Treats Secured and Unsecured Debt
Different types of debts are treated in distinct ways by U.S. bankruptcy laws.
August 26, 2012
If you are considering filing for bankruptcy, you may have questions about your debts. You will likely worry about how the bankruptcy court is going to decide which debts will be forgiven and which you may need to pay. The answer is that it depends on the type of debt that you owe. Is it secured or unsecured? Being able to tell the difference between the two types of debt can help you understand which type of bankruptcy filing is best for you.Secured Debt vs. Unsecured Debt
Secured debt is money that is owed on a bill where an asset was pledged as collateral. Common examples are mortgages on the house and car loans. In secured debts, the creditor has the right to take back the collateral--i.e., foreclose on the house or repossess the car--if the debtor stops making payments.
Once the creditor has taken back an asset that was put up for collateral, he or she can sell the asset and apply the proceeds towards the debt owed. If the selling price does not cover the total amount of the debt, the creditor can attempt to collect the remaining balance from the debtor.
In unsecured debt, there is no collateral that secures payment of the amount owed. Common examples of unsecured debt are medical bills and credit card bills. Since no collateral is involved, creditors cannot take the debtor's assets to sell and apply towards the debt. Creditors can, however, file a lawsuit against the debtor or hire a collection agency to collect the debt.
Bankruptcy's Effect on Debt Types
It can be difficult to figure out how a bankruptcy judge is going to treat each type of debt in a particular case. The determinations are largely fact-specific, and they may depend on the type of bankruptcy case that is filed.
Chapter 7 bankruptcy, in general, wipes out most unsecured debt. For secured debt, Chapter 7 can wipe out the debt, but the lien on the collateral will likely remain. This means that the creditor will still have the right to take the collateral if you do not keep up with the payments, but the creditor cannot sue you for payment of the debt.
If you file Chapter 13 bankruptcy, you propose a repayment plan to pay off all or most of your debts within three to five years. After you make the payments for the set time, the remaining unsecured debt is discharged. Secured debts are not usually forgiven in a Chapter 13 bankruptcy, but the payments for the debt are encompassed within the repayment plan. As long as you continue to make payments under your repayment plan, you are allowed to keep the collateral. If you were behind on payments for your secured debt when you filed bankruptcy, you may be able to spread the arrearage (the amount you were behind) over the entire life of the repayment plan.
This is a general discussion and there are many exceptions to the rules for the treatment of debts under the bankruptcy code. If you are considering bankruptcy, contact an experienced bankruptcy attorney to learn more about your legal options.
Article provided by Law Office of Ronald D. Cummings
Visit us at www.bankruptcylawcenter.org