If you're considering Chapter 7 or Chapter 13 bankruptcy, understanding the difference between secured and unsecured debt is essential. These two debt categories are treated very differently in both filings.
Unsecured Debts
Unsecured debt is debt that isn't tied to any specific piece of property. The most common types are credit cards and medical bills. If you default, the only way the creditor can collect is to sue, get a judgment, and then attempt to garnish wages or levy a bank account.
In Chapter 7, qualifying unsecured debt is discharged entirely. In Chapter 13, some or all of it may also be discharged, with the exact amount depending on your income, expenses, and the value of your non-exempt assets.
The difference at a glance
Which category a debt falls into decides how it's handled in your filing.
Nothing backs it
No property is attached. To collect, a creditor has to sue you, win a judgment, then try to garnish wages or levy an account.
- Credit cards
- Medical bills
- Payday loans
- Overdraft charges
- Old utility bills
- Deficiency after a repossession
Property backs it
A specific item is collateral. Stop paying and the creditor can take that item back without suing you first.
- Mortgage, backed by the home
- Car loan, backed by the vehicle
- Title loans
- Rent-to-own furniture
- Some equipment financing
Secured Debts
Secured debt is tied to a specific piece of property — collateral. A mortgage is the classic example: the debt is the loan, and the home is the collateral. A car loan works the same way, with the vehicle as collateral.
In bankruptcy, you generally have a choice: keep the property by continuing to pay the secured debt, or surrender the property and have the deficiency treated as unsecured. Which path is better depends on the equity in the property and whether the payment fits your budget.
The Bottom Line
The classification of your debts shapes your strategy. free consultations at two locations. Give us a call and we'll walk through your specific situation.