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How Bankruptcy Treats Secured and Unsecured Debt

When people are considering filing bankruptcy, they usually have a number of questions. They may wonder whether filing bankruptcy is the right choice for them, whether they will get to keep their houses, vehicles or other possessions and which type of bankruptcy they should file. People should know how the court will treat the different types of debts they have under the different chapters of the bankruptcy code when making their choices about filing.

Secured and Unsecured Debt

Secured debt is tied to a specific piece of property as collateral. If the borrower fails to repay the debt, the lender has the right to take the property from the borrower and sell it to pay off the debt. If the lender does not recover the full amount of the debt from the property sale, the lender may, depending on the type of collateral and the jurisdiction of the borrower, pursue a deficiency judgment, where the court will order the borrower responsible for the difference between what the lender received from the sale and what the borrower still owed on the loan. Debts such as home mortgages, auto loans and mechanic's liens are the most common types of secured debt.

Unsecured debt is debt that is not linked to a particular piece of property. If the borrower fails to pay an unsecured debt, the creditor can pursue a judgment by filing a lawsuit. Common unsecured debt includes credit card bills and medical bills.

Chapter 7 vs. Chapter 13 Bankruptcy

The two main types of bankruptcy for individuals, Chapter 7 and Chapter 13, treat secured and unsecured debt differently. When a person files bankruptcy, the court issues an automatic stay on collection actions by creditors, meaning that all collection actions must immediately stop.

Courts will usually allow exemptions from the automatic stay on collection for home foreclosures under Chapter 7 if the debtor is not current in payments. Additionally, in Chapter 7 bankruptcy, the trustee seizes all of the debtor's non-exempt assets for liquidation to repay creditors. When all of the assets are distributed to creditors, the court eliminates most of a debtor's debt - with certain exceptions including student loans, child support arrears and some tax debts - through the debt discharge.

In Chapter 13, the borrower may keep the property tied to secured debt and make payments to the creditor through a repayment program. Those filing Chapter 13 will also repay some of their unsecured debts to their creditors through the repayment plan, but in most cases people do not need to repay the full amount of unsecured debt.

Consult a Lawyer

Making the decision to file bankruptcy and determining which type to file can be complicated. If you are overwhelmed with debt and considering bankruptcy, talk to an experienced bankruptcy attorney who can discuss your situation with you and advise you of your options.

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