Secured and unsecured debt: What’s the difference in bankruptcy?

If you're struggling with debt, " bankruptcy" can be a scary word. Yet, in reality, bankruptcy is usually far less painful than most consumers imagine.

Part of the reason for the irrational fear surrounding bankruptcy is simply a lack of information. Whether you're missing payments, have had items repossessed or are otherwise facing financial difficulties, knowing how secured and unsecured debt differ in bankruptcy can put you a step ahead of the pack.

A Basic Overview of Secured Debt Versus Unsecured Debt

Secured debt - like a home mortgage or car loan - is tied to some tangible piece of property. The item the debt is "secured" by acts as collateral for the loan: should you become delinquent (in other words, fail to live up to the terms of repayment), the property securing the debt can be seized by the lender.

Unsecured debt, on the other hand, is not linked to a particular asset. When you fail to repay unsecured debt, your creditor may hire a bill collector or file a lawsuit to try to force you to pay, but is unable to take any of your possessions. Because collecting an unsecured debt can be more difficult, often the terms of the loan are less favorable to the borrower. Credit card debt and medical debt are two examples of unsecured debt.

Chapter 7 and Chapter 13 Bankruptcy Treat Both Types of Debt Differently

Generally, there are two types of consumer bankruptcy, Chapter 7 and Chapter 13. Chapter 7 involves an almost immediate discharge of most types of debt. If you have a lot of valuable property, you may have to surrender some of it to take advantage of a Chapter 7 filing, but generous exemptions typically allow you to hang on to important assets like equity in your home, retirement savings and tools of your trade or profession.

In Chapter 7 bankruptcy, most unsecured loans are expediently discharged, meaning they are wiped clean and you never have to repay them. Secured loans will also be discharged if you surrender the property securing them; however, if you wish to keep the property, you may do so if you reaffirm the debt and find a way to pay what you owe.

Chapter 13 bankruptcy is also known as a "wage earner's plan." In Chapter 13, you do not have to give up any assets. Instead, your debt is consolidated by a bankruptcy court under more favorable terms and you make manageable payments over a three to five year term.

Secured debts must be repaid in full in order to retain the property securing the loan, but your Chapter 13 repayment plan may provide for only fractional payment to unsecured creditors. At the conclusion of your Chapter 13 plan, most types of remaining unsecured debt will be completely discharged.

Ask a Bankruptcy Attorney Which Alternative Is Best For You

Each type of bankruptcy has distinct advantages. Whether the quick release from debt provided by a Chapter 7 case or the responsible management of your debt over the life of a Chapter 13 repayment plan is best for you depends on a variety of unique individual circumstances, including the types of debt you have, you source of income and the value of assets in your possession. To explore your options, get in touch with AMMERMAN & GOLDBERG, bankruptcy specialists today.