When you file bankruptcy, you must list all of your debts, and you must identify each debt as secured or unsecured. How the debt is identified determines how that debt will be treated when you file a Chapter 7 or Chapter 13 bankruptcy.
A secured debt is one that has collateral. This means that you have agreed to give your property to secure repayment of the debt. The most common types of secured debts are mortgages and car loans. Giving your property as collateral gives the creditor permission to take the property to pay the debt if you don’t pay. A mortgage creditor can foreclose on your house; a car lender can repossess your car.
You may also have created a secured debt with a credit card agreement that gives your purchases as collateral for the balance owed on a credit card. This is often true with furniture purchases.
Another type of secured loan is when you pledge your personal property for a loan from a finance company. These loans usually involve pledging your household goods or your car when you own it free and clear.
A debt can be secured in some cases, even if you did not voluntarily give collateral. If a creditor has sued you and gotten a money judgment, they can place a lien on your property that makes their debt secured.
There are also some liens that are allowed by state law, such as a mechanic’s lien (for a contractor’s work done on your property that you did not pay for), or a homeowner’s association lien (for unpaid homeowner’s association dues). The law also allows federal, state, and local taxing authorities to place a lien on your property for unpaid taxes.
Secured Debts In Bankruptcy
If you file a Chapter 7 bankruptcy, you must decide whether you want to keep the collateral that secures the debt. If you do not want to keep the collateral, you can surrender the property and discharge, or wipe out, the debt. If you want to keep the collateral, then you must either reaffirm the debt or redeem the collateral. You can agree to simply keep paying the debt by signing a reaffirmation agreement. You can also pay the lender the full value of the collateral in a lump sum, which is called redeeming the collateral. Either option allows you to keep the property.
If you file a Chapter 13 bankruptcy, you must still decide whether you want to keep the collateral that secures the debt. If you don’t want to keep it, you can surrender it. The creditor will sell the collateral, apply the proceeds to what is owed, and any remaining balance will be treated as an unsecured debt. If you want to keep the collateral, your Chapter 13 plan will propose a repayment schedule to the creditor that will last 3 to 5 years. For a car loan, you may be able to save some interest, lower your payment, or even lower the amount that you end up paying for the car. For a mortgage, a Chapter 13 can let you catch up mortgage payments that are behind while maintaining on-going payments, so that your payments are current when your case is over.
An unsecured debt is one that does not have collateral. Common unsecured debts include credit cards, medical bills, student loans, and utilities.Most unsecured debts are discharged, or wiped out, in a Chapter 7. But, some unsecured debts are never discharged, such as student loans, child support and alimony, and some taxes.
In a Chapter 13, unsecured debts are usually paid pennies on the dollar. For example, in a 5% plan, an unsecured creditor that is owed $100 will receive $5 paid through the plan, and the remaining $95 will be discharged. Some unsecured debts that can’t be discharged, like child support, alimony and taxes, can be paid in full over the life of the plan (3-5 years). Student loans usually receive some payment through the plan, but the remainder would still be owed at the end of your case.