As you are contemplating filing bankruptcy, it is important that you understand the major differences between secured debt vs. unsecured debt and how these debts are treated in a Bankruptcy filing.
Secured debt is attached to an asset (such as an item or object) that serves as collateral. Generally speaking if you default on your secured 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 remainder.
A few examples of a secured debt:
- Mortgages (the loan is attached to the home, therefore the home is the asset and if the payments are defaulted on the home can be taken by the bank, also known as foreclosure).
- Car loans (again the loan is attached to the car and if payments are not made the bank has the right to repossession)
- Auto loans and cash loans secured by a car title or other property.
- Boat loans
- Some installment purchases
In a Chapter 7 filing, in order to keep your secured assets (home, car, boat, furniture, etc.) you must be current on your monthly payments at the time of filing if it is your intention to keep these assets after the Bankruptcy filing. If it is your intention to surrender these assets in your Bankruptcy filing, you do not need to be current.
An unsecured debt is very different from a secured debt. There is still an agreement to repay the lender but the difference is the asset. There is no asset that is linked to the loan. Therefore, the debt isn’t attached to anything that can be taken back by the lender. The most common type of unsecured debts is:
- Credit cards,
- Medical bills,
- Utility and cell phone accounts,
- Finance company accounts, etc.
When you file a Chapter 7 Bankruptcy, the court will discharge (clear) all of your unsecured debt so that you can have a fresh start after your case is closed. After your case has been filed, it generally takes about 3-4 months prior to the discharge of your debts, depending on the complexity of your case.
Please keep in mind that there are certain debts that do not get discharged in a Bankruptcy. Debts such as student loans, alimony, child support, debts from taxes and fraud are all not dischargeable.
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DISCLAIMER: The information contained on this page is for general information, only. It is not intended to be legal advice, nor should you make legal decisions based on this information. Please consult one of our attorneys to see how the law applies to your particular situation.