What Are Secured and Unsecured Debts?

People filing for bankruptcy are put before a tough decision. Apart from the implications filing for bankruptcy will have on their life and their credit score, they are faced with a choice of filing for either Chapter 7 or Chapter 13 bankruptcy. Their choice ultimately depends on several factors, mainly which assets they want or don’t want to keep. It is not uncommon that people don’t take secured and unsecured loans into account because they don’t understand what constitutes either. They should ask for professional advice from a reputable San Diego bankruptcy attorney, and educate themselves on various options.

What is the Difference between Secured and Unsecured Debt?

There are three types of debts taken into consideration when a person is filing for bankruptcy. These types are:

Secured Debts: This type of debt is linked to a physical asset, for example, a mortgage or a car loan. If the client wants to keep their car or their home, they will need to cover any late payments. With Chapter 7 bankruptcy, clients need to pay any late amounts and keep current on their future payments or risk losing the asset in question. On the other hand, Chapter 13 allows you to cover late payments through an agreed-upon payment plan.

Priority Unsecured Debts: Unsecured debts were dubbed such because they aren’t linked to any physical assets. Regardless, they need to be paid off and in most cases do not get discharged after filing for bankruptcy. Some examples of priority unsecured debts include court fines, child support, and various taxes. In Chapter 7 bankruptcy, these debts are paid off by liquidating assets. Chapter 13 involves a payment plan that is supposed to cover your debt within the next three to five years.

Non-Priority Unsecured Debts: Debt such as medical bills, utility bills, and credit card debt are considered non-priority and are usually discharged after filing for bankruptcy.

Reaffirming Debts

Some clients can reaffirm their debt through chapter 7 bankruptcy, allowing them to keep an asset falling under the secured debt category. You can decide to keep your car but will have to cover all future payments on time. When the bankruptcy discharge is awarded, you can reaffirm the loan, which means you continue paying the agreed-upon rate from the original contract from that moment on. When you reaffirm such a debt after bankruptcy, your loan reverts to the original agreement, as if you never filed for bankruptcy. However, if you choose to reaffirm your debt, the lender retains the ability to repossess your assets if you don’t continue making payments.

Can Student Loans Be Discharged?

Student loans are a bit of an exception to the rules above. While they are considered non-priority debt, they usually don’t get discharged after filing for bankruptcy. In order to have them dismissed, you have to prove that both you and your dependents were unable to pay them off due to an undue hardship. This process can be extremely difficult and the chances of this debt being discharged are very slim.

Need Professional Advice? Seek Help From the Leading San Diego Bankruptcy Attorney!

If you are still unsure whether your assets constitute secured or unsecured debts, don’t hesitate to reach out to the Bankruptcy Lawyers Chang & Diamond, APC. Our company was founded in 1998, and has helped clients in numerous bankruptcy cases since, building a reputation as accessible and affordable bankruptcy attorneys in San Diego and surrounding areas. Reach out for a free initial consultation at (619) 312-4900.