Understanding Secured Vs. Unsecured Debts During Bankruptcy

 Posted on February 14, 2022 in Bankruptcy

Most people have debts of some sort. Certain types of debts may be necessary to own a home or vehicle, and other debts may be used to make purchases or receive education or medical treatment. While debts may be manageable for many people, there are situations where they can cause significant financial difficulty, especially if a person or family encounters issues that affect their income and ability to make payments. In these cases, bankruptcy may be an option that will allow for the elimination of debts. However, those who are looking to receive debt relief will need to understand how different types of debts are classified and how the type of bankruptcy they pursue will affect the debts they owe.

Addressing Secured and Unsecured Debts Through Chapter 7 or Chapter 13 Bankruptcy

Debts generally fall into one of two categories:

• Secured debts - These debts require a person to put up certain property or assets as collateral, providing security for the lender. If the borrower defaults on these debts, the lender may take possession of the collateral to ensure that they will be repaid for the amount of the loan. In many cases, collateral will be the property a loan was used to purchase, such as a home or vehicle. However, a person may use their assets as collateral in other debts, such as by securing a business loan with the equity they own in their home.

• Unsecured debts - These debts will not require a person to put up collateral as a security. Because lenders have increased risks in these debts, they will usually charge higher interest rates. Credit cards are some of the most common unsecured debts, but other types of loans or payments owed, such as medical bills, may be included in this category.

How secured and unsecured debts are handled during the bankruptcy process will depend on the type of bankruptcy a person pursues. Chapter 7 bankruptcy will allow for the discharge of both secured and unsecured debts after a debtor’s non-exempt assets are liquidated and used to repay some of what they owe. However, while unsecured debts may be eliminated relatively easily, the discharge of secured debts will usually lead the lender to repossess the collateral used to secure a loan.

To avoid the loss of property, a debtor may opt for Chapter 13 bankruptcy. This will allow them to consolidate payments for certain debts into a repayment plan that will last between three and five years. To avoid the loss of collateral in secured debts, the debtor will need to become current on any past-due payments and continue making ongoing payments toward these loans. If necessary, a payment plan may include past-due payments or fees on secured debts, allowing a person to resolve any issues related to defaults on these debts. After completing their repayment plan, unsecured debts included in the plan will be discharged. Chapter 13 bankruptcy will allow for the elimination of some debts, but secured debts may remain in place to ensure that a person can maintain ownership of their home, vehicles, or other assets.

Contact Our Kerrville Debt Relief Lawyer

The Law Offices of Chance M. McGhee can explain your rights and options regarding different types of debts, and we will work with you to determine whether filing for bankruptcy will be the best solution for you. We will make sure you take the correct steps to receive debt relief and get the fresh start you need. Contact our New Braunfels bankruptcy attorney at 210-342-3400 to arrange your free consultation.

Sources:

https://www.investopedia.com/ask/answers/110614/what-difference-between-secured-and-unsecured-debts.asp

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics