When you file bankruptcy it’s important to know the difference between your secured and unsecured debt. Secured debt and unsecured debt may be treated differently, particularly if your are trying to keep the collateral, like a car or a home, which secures the debt.
Secured Debt: A secured debt is a debt for which the creditor has the right to take specific property that you promised as collateral if you stop making payments on a loan. Loans for things like a car or a house are usually used as collateral to secure consumer loans. However, some department stores will take a security interest in certain property like furniture or computers when you use their credit card.
Unsecured Debt: If you have simply promised to pay someone a sum of money at a particular time and have not pledged any property, it is an unsecured debt. This may include a judgment that is not secured by a lien. Typically, things like medical bills and gas or electric bills are unsecured debts.
When you file Chapter 7 bankruptcy and owe any money on a secured debt, you’ll have to indicate what you intend to do with the collateral. You can either surrender the property, redeem (buy it outright with a lump sum), or reaffirm the debt. You should know that if you reaffirm, that debt is not eliminated. You’ll still be liable after your case is closed. While reaffirmation agreements are common for car loans (though not always advised), they are not required for home mortgages. Chapter 13 bankruptcy will allow you to keep whatever collateral as long as your plan provides that payments will be made to those creditors. Secured debts for luxury items like boats, second mortgages, recreational vehicles, and so on are subject to the trustee and your creditors’ approval. Unsecured creditors may argue that money for payments to your boat loan should go to them instead.
Commons unsecured debts like credit cards and medical bills are eliminated completely in Chapter 7 bankruptcy. Some unsecured debts, like alimony and child support, are not dischargeable at all. In Chapter 13 bankruptcy, you may have to pay a portion of your unsecured creditors back, but that depends on what your disposable income is. You’ll know what portion you’ll have to pay before you Chapter 13 case is filed.
If you have questions about what will happen to your unsecured and secured debts when you file bankruptcy, please come in for a free, no-obligation consultation with an experienced attorney. You can make an appointment using our online scheduling system or by calling 303.331.3403 to set up a time that is convenient for you.