Secured vs Unsecured Debt - Frank J. LaPerch, PC

What is the Difference between Unsecured Debt and Secured Debt?

Financial debt occurs when you borrow money to pay for something. There are two types: unsecured and secured. It is the item or items for which the money is borrowed that determine whether it is secured or unsecured debt. For instance, if there is property a creditor can take from you if you fail to pay the debt, it is a secured debt. There must be a tangible item with value in order to qualify as a secured debt. Though this basic explanation is often enough to determine if debt is secured or unsecured, there are a few additional things to consider concerning the differences between unsecured and secured debt.

Unsecured Debt

Unsecured debt occurs when money is owed for something in which there is no tangible value for the creditor. Examples of unsecured debt include medical bills and credit cards. Debtors are not required to “put up” items as security for the debt. If you fail to pay for an operation, there is nothing the creditor can take from you to make up for the missed payments.

Bankruptcy is particularly effective for eliminating some kinds of unsecured debt. Both types of bankruptcy can eliminate unsecured debt, but Chapter 13 usually requires at least partial repayment of unsecured debt. When a debtor has no assets or is up to date on secured debt payments.

Chapter 7 allows him or her to eliminate credit card bills, debts in the hands of collection companies, signature loans, payday loans, lawsuits, and a variety of other debts. The main goal of a Chapter 7 bankruptcy is to get this type of debt discharged. Chapter 7 can also eliminate your personal obligation on secured debt, such as a home, but that doesn’t mean you would lose the asset. As long as you keep paying your mortgage, you would be able to keep the home because you are not in default of your loan. If in the future you did fall behind you would lose the home, but not be personally responsible for any deficiency on the mortgage. This of course assumes that when you filed you did not have any equity in the home above the allowable exemptions.

An automobile is a unique secured debt example because under the current bankruptcy law you are supposed to execute a reaffirmation agreement to keep the secured property (the automobile). This agreement would mean you re-obligate yourself on the secured debt and in the event of a post-bankruptcy default, the creditor can re-possess the car and pursue you for any additional monies still owed. Many people do not reaffirm and simply stay current with their payments and the creditor often will not re-possess the vehicle even though they do have the legal right.

For debtors concerned about the risk of repossession, they often will reaffirm the debt to be safe. The repossession of vehicles with current payments is really a policy that varies from creditor to creditor and an experienced bankruptcy attorney can advise you properly of the risks and rewards of the reaffirmation agreement.

In cases when a debtor also has secured debt and is in danger of falling behind because of other debts, Chapter 7 can help.

For instance, if you are up to date on mortgage payments at the moment, but having a difficult time making ends meet because of credit card debt, Chapter 7 might allow you to get rid of the credit card debt so all of your money can go toward your most important priorities, like a home or car payment.

Bankruptcy Courts Can Assign Priority to Certain Debts

Priority debts are unsecured, but take precedence of other types of debt and are less likely to be discharged in a Chapter 7 filing. There are several types of debt that are assigned priority, including domestic support, some taxes, and death or injury claims owed because of DUI charges.

Secured Debt

As mentioned earlier, secured debt is debt for which there is property. If the debtor fails to make payments, the lender is authorized to assume ownership of that property. This is what occurs during the foreclosure of a home or repossession of a vehicle.

It is possible not only to lose your home or vehicle for a loan taken to pay for that item, but also in instances when those items are used as collateral for an unrelated loan. People have obtained loans using everything from their home to household appliances as collateral. If the debtor falls behind in payments, the lender is legally authorized to take the collateral property from them even though the money might not have been borrowed to pay for these items.

Another issue that often comes up is the fine print for charge card agreements in certain stores. Some stores offering charge cards have language in the application that makes any item purchased collateral for repayment. In the event of filing bankruptcy, the creditor might request the return of the property.

This would be different if you had purchased the item on a separate credit card where no security interest was incurred. This takes many people by surprise because they did not realize the items purchased actually had this security interest created by the terms of their charge card.

This is not the norm and often the stores do not pursue the return of the item, but it is something an experienced bankruptcy attorney can spot and properly advise you about.

Understanding the difference between secured and unsecured debt when you decide to file for bankruptcy is essential. Determining whether you want to keep property affects the type of bankruptcy you should choose. Your bankruptcy attorney can explain in detail which type of bankruptcy is best for you based on your situation and your priorities.

If you would like to learn more about secured or unsecured debt or you are ready to file for bankruptcy, contact the law office of Frank J. LaPerch, PC at 845.942.5500.

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