A frequent topic of discussion in the initial consultation is the difference between secured and unsecured debt. While the difference is fairly easy to understand, the way in which they are treated can be complex.
On its most basic level, a debt is secured when you provide property as collateral for the debt. The lender then has a “lien” on that property. Once the lien is created, the lender can get the property back if you fall behind on loan payments. If the secured loan is a mortgage, the lender could take your home through a foreclosure.
The most common forms of secured debts are car loans, mortgages, and personal property loans. While secured loans are usually an agreement between you and the lender, debts such as tax liens can become secured without your consent.
An unsecured debt is a debt that is not secured by collateral. The most common forms of unsecured debts are credit cards, medical bills, signature loans, and student loans. Usually, a lender collects on unsecured debt by filing a lawsuit against you and asking the court for the right to garnish your wages or bank account balances.
Secured and unsecured debts are treated differently in a Chapter 7 bankruptcy case and in a Chapter 13 reorganization. In Chapter 7 cases, most unsecured debts are dischargeable while a secured debt would not be if you want to keep the collateral. In a Chapter 13 reorganization, you must pay the secured debt to keep the property that was pledged as collateral. However, you may only have to pay a portion of your unsecured debt. In some cases, you may not have to pay any of the unsecured debt.
While the difference between secured and unsecured debt is fairly simple, the way each debt is treated can be quite complex. For this very reason, it is essential that you speak with an experienced attorney to know your rights regardless of what type of debt you owe. If you need financial help, please contact our office nearest to you to set up a free private and confidential consultation visit with one of our licensed attorneys.