What Type of Bankruptcy is Best for You

September 08, 2012

Many people who are dealing with debt problems struggle over whether to file for bankruptcy protection. Most are deterred by common bankruptcy myths, such as not being eligible for loans ever again, or losing all of their personal property. Regardless of the fears involved, bankruptcy is a major undertaking. Part of moving past these fears is learning about the debts that may be discharged and how different debts affect the property that may be protected.

Unsecured vs. secured debts

In a nutshell, bankruptcy law revolves around secured and unsecured debts. Distinguishing the two is relatively simple. Essentially, a debt or loan is "secured" if it is backed by something of value, formally known as "collateral." If you don't pay the debt or maintain a payment schedule, your creditor will "seize" or take back the collateral as payment. Hence, the designation "secured asset." Car loans, home mortgages and home equity lines of credit (HELOCs) are examples of secured debts.

Conversely, unsecured debts are those that are not attached to property that is supported by the value of the particular asset such as a house, car or furniture. Examples of unsecured debt include credit card debt, service debts, personal loans and medical bills.

One thing to keep in mind; if the loan amount attached to secured property exceeds the property's value, that portion of the loan can also be considered unsecured debt. An "underwater" home is the best example of this.

Why is this important?

The nature of your debts helps in determining what type of bankruptcy is best for you. If you have a number of valuable, secured assets that you want to retain, a Chapter 13 bankruptcy may be best. This type of bankruptcy allows debtors to keep secured property while they follow a payment plan. This is especially important if you have significant equity in a home, or you need to keep a particular type of vehicle (such as a truck) to continue to make a living.

If you do not have any secured property (or very little of it), a Chapter 7 bankruptcy may be appropriate. In Chapter 7 cases, the bankruptcy trustee gathers non-exempt property (i.e. property that cannot be legally retained) and sells it. The proceeds of the sale are used to pay your outstanding bills. Those who fear losing everything to bankruptcy need not worry. Most Chapter 7 debtors can retain their personal property, such a clothing, electronics, furniture and household items after their debts are discharged.

If you have questions about the type of debt you have, an experienced bankruptcy attorney can advise you.

Article provided by Genova & Malin, Attorneys at Law
Visit us at www.hudsonvalleybankruptcylawyers.com