The treatment of secured and unsecured debts in bankruptcy
If you are having financial problems, you may be considering bankruptcy, but would like to know what would happen to your debts after the process has been completed. In general, this depends on the types of debts that you have-whether they are secured or unsecured. In bankruptcy, each type of debt meets a different fate.
Secured debts are debts where you put up collateral to secure your promise to repay. Common examples of this type of debt include mortgages and car loans. In cases where you fail to keep up with the payments on your secured debts, your lender may reclaim and sell the collateral (i.e. the house or car) to pay off the remaining balance of the debt.
Conversely, unsecured debts do not involve the pledge of collateral. This type of debt includes, medical bills, credit card debt and personal loans. If you fail to repay these debts, your creditors may not take any property. However, they have the option of suing you, putting liens on your property and/or garnishing your wages to force you to repay the debts.
How bankruptcy affects each type
Generally speaking, each debt type is affected differently, depending on the type of bankruptcy you file. If you file Chapter 7, most, if not all, of your unsecured debts are quickly discharged. However, Chapter 7 does not do the same for your secured debts. Although Chapter 7 can eliminate your legal obligation to repay your secured debts, it does not prevent your creditors from taking back the collateral pledged. As a result, if you would like to keep your collateral, it is necessary to stay current on your secured debts during Chapter 7.
During Chapter 13, both types of debt are consolidated into a payment plan. Pursuant to the plan, you make monthly payments towards your debts over three to five years, eventually paying off or becoming current on them at the end of this period. However, unsecured debts are not repaid at all under the plan most of the time. This is because the bankruptcy laws only require you to repay your unsecured creditors as much as they are entitled to if you filed Chapter 7. Since most unsecured creditors are paid nothing (or very little) in Chapter 7, most unsecured debt is discharged at the end of the payment plan.
If you are struggling with secured debts, Chapter 13 can be very helpful. Although it will not eliminate your secured debts, Chapter 13 gives you three to five years to become current on them. If you keep making your monthly payment under the plan, your creditors may not take and sell the collateral or any other property during the repayment period. After you complete Chapter 13, you are current on your secured debts and resume making your normal pre-bankruptcy payments on them.
If you are dealing with unmanageable debts, it is important to take action while your options are greatest in number. An experienced bankruptcy lawyer can examine your situation and recommend the best way to turn your financial difficulties around.
