Secured vs. Unsecured Debt
Secured debt is debt that is backed up by some sort of tangible asset as collateral. If you default on your debt, the lender can seize the asset and sell it to recoup the money you owe. If the sale of the asset does not generate enough money, the lender can come after you for the rest.
Common forms of secured debt include home mortgages, auto loans and cash loans secured by a car title or other property.
Unsecured debt is just the opposite – creditors cannot seize your property to recoup what they are owed. Instead, they must hire a debt collector, file a lawsuit or get a court order to recovery money you have not paid. Common forms of unsecured debt include credit cards, medical debt and student loans.
How are These Debts Treated in Bankruptcy?
How your debts will be treated depends on whether you are filing for Chapter 7 or Chapter 13 bankruptcy.
In a successful Chapter 7 bankruptcy, the court will discharge unsecured debt. If this happens, you will not need to pay back most of your unsecured loans. Secured debt is another story – in most cases, you will be given a choice between allowing creditors to seize your =collateral or continuing to make payments to pay off that debt.
In Chapter 13 bankruptcy cases, you will follow a repayment plan approved by the bankruptcy court to help you pay back your debt over a period of three to five years. Secured debts must be paid within the repayment plan. As such, they are given priority over unsecured debts.
Unlike the secured debt, there is no requirement that the unsecured debt be paid in full. Typically unsecured debts receive some money from the repayment plan and the remaining balance left over at the end of the plan is discharged.
In Chapter 13 bankruptcy, you usually get to keep your property as long as you fulfill your obligations in the repayment plan.
It’s important to note that some debts are not dischargeable, even in bankruptcy. For example, student loans, child support, alimony payments and debts resulting from a drunk driving charge are not dischargeable in either Chapter 7 or Chapter 13.
Bankruptcy is a very complicated process, and no two filers will have the exact same outcome. If you’re considering bankruptcy, make sure you enlist the help of an experienced Los Angeles bankruptcy attorney.