Understanding Secured and Unsecured Debt
A misconception exists that when you file for bankruptcy, all your debt is discharged. Though anyone suffering from financial hardship would prefer to have a clean slate to get back on their feet, it is not always the case. Much of what debt is discharged depends on the type of debt it is and under which chapter you file for bankruptcy.
At Wiesneth Law, our bankruptcy attorney can help you understand what debt is dischargeable. We will review your financial situation, listen to your concerns about the outcome of your bankruptcy, and advise you accordingly on how to proceed. Contact our office today at 812-234-4300 (Terre Haute) or at 812-422-9400 (Evansville) to schedule a free consultation to learn more about your options when filing for bankruptcy.
Why Does the Type of Debt You Have Matter in Bankruptcy Cases?
Not all debt can be discharged when you file for bankruptcy and that is why the type of debt matters. Before you file a bankruptcy petition, you need to know what is dischargeable, what is not, and what might be under certain circumstances. The three types of debt you need to know are secured, priority, and unsecured debt.
What is Secured Debt?
Secured debt is just that: it is debt that is secured by an asset. For example, if you buy a car, and you take out a loan to buy that car, you sign a document saying that you understand that if you do not make your payments as agreed upon, the lender is able to repossess the car. That is because the money that was lent to you was secured by the car.
If you file for a Chapter 13 bankruptcy, you may have choices about what to do with secured collateral. You may be able to keep it and include it in the plan payment or you may need to return the property to the lender.
If you file for a Chapter 7 bankruptcy, your secured debt may be discharged, but the lender is also able to repossess the property that secured the debt. In other words, if you have a mortgage on your home and file a Chapter 7 bankruptcy and you do not reaffirm on the debt, the mortgage debt may be discharged but the lender can take back your home.
What is Unsecured Debt?
Unsecured debt is debt that is not backed by any collateral. Credit card debt is unsecured debt. A credit card company gives you a credit card with a specific limit on it after you sign. The agreement between you and the credit card company basically expresses you will pay back any amount charged with interest. The loan is based on your agreement alone. If you do not pay the debt back, the lender has limited options and typically cannot repossess anything.
Bankruptcy courts further differentiate unsecured debt by dividing it into two different categories: priority unsecured debt and nonpriority unsecured debt.
- Priority unsecured debt is paid before nonpriority unsecured debt. Examples of priority unsecured debt include child support, personal injury claims, and wages owed to employees.
- Nonpriority unsecured debt includes credit cards, medical bills, and personal loans.
Dischargeable vs. Non-Dischargeable Debt in Chapter 7 Bankruptcy
Like Chapter 13 bankruptcies, both secured and unsecured debt can be discharged in Chapter 7 bankruptcies with some significant exceptions when it comes to unsecured debt.
The following debt can be discharged in a Chapter 7 bankruptcy:
- Medical bills
- Personal loans
- Credit card debt
Typically, there are certain types of unsecured debt that cannot be discharged in a Chapter 7 bankruptcy, including:
- Student loans
- Back Child Support
- Debt incurred from fraud (for example, if you lied on an application and the debt was incurred from the lender's reliance on that lie)
- Money obtained in anticipation of the bankruptcy filing
Dischargeable vs. Non-Dischargeable Debt in Chapter 13 Bankruptcy
Both secured and unsecured debt can be discharged in Chapter 13 bankruptcies, but there are also non-dischargeable unsecured debts that cannot be discharged.
The following debt can be discharged in a Chapter 13 bankruptcy:
- Credit card debt
- Debt due to payment of non-dischargeable taxes
- Medical bills not fully covered by insurance
- Unsecured personal loans
- Penalties and fines owed to the government
- Certain tax obligations
- Judgment debt
There are also certain types of unsecured debt that cannot be discharged in a Chapter 13 bankruptcy, including:
- Child support
- Criminal penalties
- DUI penalties
Contact a Bankruptcy Attorney in Terre Haute or Evansville Today
Bankruptcy is a way to get a fresh financial start, and in doing so, it helps you get your life back on track. Through this process, it is integral to understand what debt can and cannot be discharged.
At Wiesneth Law Offices, our bankruptcy attorney will thoroughly answer your questions, review your financial situation, and guide you through the process. If you have difficulty paying bills because of the debt you or your company have accumulated, speak to our firm by filling out our online contact form or by calling our office at 812-234-4300 (Terre Haute) and 812-422-9400 (Evansville). We will schedule you a free consultation with our attorney so that you can get the answers you need to all your financial questions.
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