Most bankruptcy filers owe money on several different lines of credit. Generally, bankruptcy courts break debt into two categories – secured and unsecured – and treat each type differently
Although everyone’s bankruptcy is different, understanding the types of debt and how they are treated by the Bankruptcy Court can help you better predict what your finances will look like when you emerge from bankruptcy. Your bankruptcy lawyer can give you a more complete picture of how your individual debts will be treated by the bankruptcy court.
What is Secured 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
- Cash loans secured by a car title or other property
What is Unsecured Debt?
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 recover money you have not paid.
Common forms of unsecured debt include:
- Credit cards
- Medical debt
- Student loans
- Personal loans
- Back rent
- Utility bills
- Business loans
How Are Secured & Unsecured 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 3 to 5 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.
Which Debts Are Not Discharged in Bankruptcy?
It’s important to note that some debts are not dischargeable, even in bankruptcy.
For example. these are not dischargeable in either Chapter 7 or Chapter 13:
- Student loans
- Child support
- Alimony payments
- Debts resulting from a drunk driving charge
Learn More About Discharging Your Debts in Bankruptcy
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.
We provide free consultations to help you learn more about your options.