What You Need To Know About Secured And Unsecured Debts In Bankruptcy

As a bankruptcy lawyer tries to help a client figure out how to file a case, a lot of the issue boils down to the types of debt involved. In American bankruptcy law, a debt is either secured or unsecured. It's important to know what each one is and how that might influence your bankruptcy petition.

Secured vs. Unsecured Debts

When someone takes on obligations, there are two ways they can back up those obligations. The first way is a security, meaning a physical asset backs up the debt. The second way is through their faith and credit, meaning they don't put up anything to support the creditor in recovering what's owed in case of default.

Secured debts allow creditors to repossess whatever thing is securing the obligation. If you have a vehicle loan, for example, the finance company can take possession of the car if you fail to pay.

Conversely, an unsecured debt gives the creditor nothing to repossess. If you buy a bag of groceries on a credit card, no one gets to take the food back from you.

Liquidation vs. Restructuring

A bankruptcy lawyer will tell you that you have two potential options. Liquidation is a process where the court sells all of your disposable assets and pays whatever proceeds they can from the sale equitably to your creditors. Restructuring means you pay part of what you owe on a structured plan. The court discharges the difference if and when you complete payments.

Secured debts can only be kept if you restructure what you owe, usually through Chapter 11 or 13 bankruptcies. If you go the other route, meaning Chapter 7, your creditors will be able to repossess all assets that secure your debts. Notably, it may be possible to do a Chapter 7 filing followed by a Chapter 13 one, but that's something that takes a lot of planning with a bankruptcy attorney and the cooperation of the court.

Choosing

Depending on your circumstances, you may not get to choose. A court can determine that someone has too little income to make good on a Chapter 13 plan, for example. Similarly, you might have too much income to file Chapter 7.

If your income is somewhere in the middle of those two extremes, though, the decision is largely about how much secured debt you have. Someone with loads of credit card debts but no mortgage or car loans might be further ahead to liquidate and start clean. A person trying to keep a mortgaged house, though, would probably prefer Chapter 13.

Reach out to a local bankruptcy attorney to learn more about your options.