Know Your Debt – What Is Secured and Unsecured Debt in Bankruptcy?
Individuals exploring bankruptcy are often confused by the language and terminology associated with it. Bankruptcy is a complex process and requires an understanding of how each type of bankruptcy can benefit an individual and their family.
It is important for people trying to choose between Chapter 7 or Chapter 13 bankruptcy to understand the differences between debts and how they are treated in bankruptcy. For people living around Atlanta, a conversation with a Douglasville bankruptcy attorney can be extremely helpful. An experienced attorney will go over options for each individual and educate them about the respective benefits of each type.
Before that meeting, it is often useful for people to get a preliminary understanding of how debts are treated in bankruptcy. The key to dealing with debts is learning about the difference between secured and unsecured debt.
Secured Versus Unsecured Debt
A secured debt is one that is attached to another piece of property. The property is considered collateral. The lender retains the right to take back the property if the borrower does not make payments. This type of debt arrangement is often used for mortgages or car loans. People who want to keep secured items will need to keep paying for them in order to keep them.
In contrast, an unsecured debt is not attached to any property. This leaves the lender without any special collection rights against a debtor. The most common types of unsecured debts are credit card debts, medical bills and some loans.
Treatment in Bankruptcy Proceedings
People can manage their secured and unsecured debt differently depending on the type of bankruptcy they choose.
Chapter 7 bankruptcy is often attractive to people because it is relatively fast. Most unsecured debts will be discharged approximately three months from the filing date. Secured debts are not wiped away in Chapter 7 bankruptcy. Lenders do not lose the right to recover their property. People who want to keep their secured items must continue to make payments for them.
In Chapter 13 bankruptcies, people often put certain secured debts into their plan to get paid off over the course of the plan. The most common types of secured debts that are put into Chapter 13 plans are mortgage arrears and car payments.
Mortgage arrears allow homeowners the opportunity to stave off foreclosure by catching up on payments while being protected by bankruptcy's automatic stay.
Chapter 13 plans are attractive to car owners because they can often get their cars paid off over the course of the plan, sometimes at more favorable terms. In addition, Chapter 13 bankruptcies will typically pay off some unsecured debt while discharging the balance at the end of the plan.
There are many factors that must be considered when selecting the right type of bankruptcy. Determining the best chapter requires an evaluation of an individual's entire financial picture. If you are thinking about bankruptcy, you should speak with an experienced Atlanta bankruptcy attorney who can review your situation with you.