The main reason that a person files for bankruptcy is to get out from under their crushing debts. But not all debts are structured the same. Generally speaking, a debt is either classified as secured or unsecured debt. And while bankruptcy can eliminate a person’s obligation to repay both types of debts, it is still important to understand how they differ, and what the post-bankruptcy impact could be on your family’s financial situation.
In simple terms, a secured debt is one that is backed by some form of property. The two most common forms of secured debt most people have are their home mortgage and car loan. These debts are secured by the house and automobile, respectively, meaning the creditor has the right to seize and sell the property if the debtor fails to repay their loan.
An unsecured debt, in contrast, is backed by nothing more than the debtor’s promise to repay. Credit card debt is typically unsecured. If you do not pay your credit card company, or any other unsecured creditor, they cannot simply take your stuff. Instead, the creditor has to go to court and obtain a civil judgment against you.
How Bankruptcy Deals With Secured Creditors
If you file for Chapter 7 bankruptcy, the court will discharge your debts after liquidating any non-exempt assets you own. A discharge means that you no longer have to repay any debt, whether secured or unsecured. But the discharge does not eliminate a secured creditor’s right to take back its collateral.
Put another way, if you cannot meet your monthly mortgage payments, filing for Chapter 7 will release you from having to repay the loan in its entirety, but the bank can–and probably will–take your house. Now, this may be a desirable outcome, especially if you are underwater on your loan and you were planning to walk away from the property. But if your goal is to file for bankruptcy and keep your house, you will need to stay current on your payments.
Indeed, you are usually better off filing for Chapter 13 if your goal is to keep a secured asset. Under Chapter 13, the bankruptcy court does not immediately discharge your debts. Instead, you must agree to a plan to repay your outstanding debts over a period of 3 to 5 years. This can help you pay back any missed mortgage or car loan payments over an extended period of time, during which you can keep the asset.
How Bankruptcy Deals With Unsecured Creditors
When it comes to unsecured debts, many creditors will receive little if anything from the bankruptcy process. Some unsecured debts have priority under the Bankruptcy Code and cannot be discharged–such as child support payments or debts arising from criminal activities–but when we are talking about most unsecured debts like credit card payments, those creditors have to go to the back of the line.
In a Chapter 7 case, the unsecured creditors will only receive what is available after your non-exempt assets are liquidated, which in many cases means nothing. In Chapter 13, the amount available for unsecured creditors under a payment plan is essentially your disposable income less your monthly payments to any secured or priority unsecured creditors. In either case, once you receive a discharge from the bankruptcy court, the unsecured creditors can take no further legal action against you to collect on their debts.
This is only a brief overview of how bankruptcy treats secured and unsecured debts. If you need specific advice or legal representation from an experienced Iowa bankruptcy lawyer, contact the Telpner Peterson Law Firm, LLP, today to schedule a consultation.