In bankruptcy, it is essential to understand secured versus unsecured debts. Secured debts generally involve property whereby the creditor has a lien on that property such as car loans and mortgages. Whereas unsecured debts, by contrast, are not secured by any collateral like credit card debt, medical bills, student loans, alimony, and personal loans.
Understanding Secured vs Unsecured Debt
While bankruptcy eliminates your liability for unsecured debts, it doesn’t eliminate the creditor’s vested interest in the property. Consequentially, lenders can still enforce their lien and repossess the property.
Secured Debts in Chapter 7
In Chapter 7 bankruptcies, you must continue making regular payments on secured debts if you want to keep the property. Otherwise, you have the option to surrender it back to the creditor. If the value of the property securing the loan is less than the loan balance, you can also seek to redeem the property for its true value ~ this is especially useful if you have a car that is upside down.
Secured Debts in Chapter 13
In Chapter 13 bankruptcies, certain secured creditors are treated differently. If you want to bring your delinquent mortgage current, you must pay the normal monthly mortgage payment plus part of the delinquency every month in the plan, but if your mortgage is current, you can continue to pay it outside the bankruptcy because it is considered long-term secured debt.
With car payments, you have options, too. If you are set up on automatic debit by your lender, you can continue to pay your car outside the bankruptcy, but you also have the option of re-amortizing your balance over the life of the plan at a low interest rate (4-5%). If you have owned your car more than 910 days, you can “cram it down,” thereby reducing the balance to the fair market value. In both of these cases, at the end of the plan, the car is paid off.
Some secured debts can be eliminated without giving up the collateral ~ called lien stripping. For example, if you owe more on your first mortgage than your home is worth, you can eliminate 2nd mortgages, HELOCS, HOA liens and any other involuntary lien on your home.
Whereas liability for secured debts is dependent on the type of bankruptcy filing, unsecured debt is approached differently. Personal liability for unsecured debt largely depends on whether the debt is a priority or non-priority.
Most unsecured debts are considered non-priority and are fully dischargeable in bankruptcy. These would include credit card debt, medical bills, or personal loans.
Student loans are technically non-priority, but unlike all other non-priority debts, they are generally not dischargeable, absent a showing of “undue hardship.” Student loans are a huge problem in this country, and maybe at some point down the road, their status in bankruptcy will change.
Some unsecured debts, such as alimony, child support, and certain unpaid taxes must be paid in full in Chapter 13 in order to get a discharge of other debts. The good news here is that eliminating the unsecured debts make paying these priority debts that much easier.
Parker & DuFresne
Filing for bankruptcy can be a lengthy and difficult process and should not be done without the legal guidance of an attorney that you trust. At Parker & DuFresne, our specialty is in bankruptcy law, and our goal is to get clients across Northeast Florida back on the path to financial stability.
Starting with a thorough consultation, we help you determine if bankruptcy is the right solution for you and help you to identify the secured versus unsecured debts that may apply to your case specific to your case. We will develop the legal strategy best suited for your financial situation, but it doesn’t stop there.
Unlike other bankruptcy law firms, we work with you after your bankruptcy to rebuild your credit because a better credit rating means lower interest rates on cars and homes, which means MUCH lower monthly payments. By breaking the cycle of bad credit, you will have financial stability for the rest of your life. Contact us today to learn more!