How Secured and Unsecured Debt Affect Bankruptcy

In Chapter 7 and Chapter 13 bankruptcy, whether a debt is secured or unsecured makes a big difference. Different types of debts are treated differently in bankruptcy proceedings. Certain debts are eligible for discharge. In order to better understand the distinction between the secured and unsecured debt, you should acquaint yourself with their unique characteristics. Your experienced bankruptcy attorney in Poway has prepared some basic explanation to dispel any doubts you may have.

What is secured debt?

Secured debts are those that you collateralized with an asset you own as the repayment guarantee. Because of the added protection that the collateral gives to the creditors, secured loans are usually offered at lower interest rates. But if you fail to make payments, secured creditors are entitled to the collateral.

A mortgage is a good example of this type of debt. A lender will place a lien, or financial interest, on the property until the loan is fully repaid. In case the borrower defaults on the loan, the bank can seize the property and sell it to recover the owed funds.

What is unsecured debt?

Unsecured debts require no security for the loan. Any debt you have without specific collateral is unsecured debt. Your credit card debt, for example. If you stop making payments on your credit card and the creditor fails to get you to pay, you may face a debt collector knocking on your door.

The creditor, though, has no right to acquire any of your assets. First, he must sue you for repayment and ask the court for permission to seize your property, garnish your wages or put a lien on one of your assets so you can’t sell it without paying your debt.

Dischargeability

Though the borrower is responsible for repaying all of his debts, it is not always possible. Debt piling up is one of the warning signs you may need to declare bankruptcy. After consulting with a bankruptcy attorney in Poway or another area you live, you may see it as your best chance to make a fresh start. But keep in mind that not all debt is dischargeable.

Secured debt. Secured debts are non-dischargeable in bankruptcy. Therefore, if you continue to make payments, you’ll be able to keep your house or car. If you decide to give back the property, the deficiency left under the original contract becomes unsecured debt and you may get it discharged on the same basis as other unsecured debts.

Unsecured debt. In case of unsecured debt, bankruptcy can wipe out most of it, such as personal loans, medical and utility bills, credit card debt, and civil court judgments (unless they involve fraud).

Priority unsecured debt. There are, though, priority unsecured debts, which need to get paid. Even after your bankruptcy case is over, you will continue to owe debts such as certain tax debts, child support and alimony and court fees and fines.

Even though they don’t belong to priority unsecured debts, student loans and regular income tax debt are not discharged unless you prove an exception applies.

If you file for Chapter 7 bankruptcy, non-dischargeable debts are still collectable after bankruptcy. If you file for Chapter 13 bankruptcy, you will still owe any portion of these debts you can’t fully pay through your repayment plan. Debts not listed on your bankruptcy petition are also not discharged. Creditors must receive notice of the bankruptcy to be bound by it.

Contact a bankruptcy attorney Poway

Being a complex process that takes many factors into account, bankruptcy requires thoughtful consideration and consultation with a lawyer. A reliable way to determine dischargeability is to discuss your debts with a bankruptcy attorney in Poway or another area you live.

Our attorneys at Chang & Diamond, APC will examine when each debt was incurred and if it was a personal loan, credit card charge or a medical bill. We’ll also look at some debts that may not be dischargeable, such as student loans, child support or spousal support.

Contact us for a free initial consultation to discuss filing Chapter 7 or 13 bankruptcy and make an informed decision. Our offices are located in the San Diego and Riverside area, Temecula, and El Cajon and East County area. Our lawyers are dedicated to providing you with answers and helping you deal with your financial hardship through bankruptcy.