The Difference Between Secured and Unsecured Debt in Bankruptcy

The Difference Between Secured and Unsecured Debt in Bankruptcy

There is a difference between secured and unsecured debt, and both are treated differently in bankruptcy. After bankruptcy, you will no longer owe your unsecured debts. As for your secured debts, you will have two options in deciding whether or not you want to keep those debts. Keeping a secured debt means you can keep the property that is security for the debt.

The difference between secured and unsecured debt is that one is secured by collateral and the other is not. If you fail to make payments on an unsecured debt, the creditor you owe cannot force you to pay off the debt without first filing a lawsuit and getting a judgment against you for that debt. If you fail to make payments on a secured debt, the creditor you owe can repossess your property that is security for the debt. If you fail to make your car payments, the creditor can send a repo agent to repossess your vehicle to pay off the car loan. If you fail to make your mortgage payments, the creditor can foreclose on the house and force it to be sold to pay off the mortgage. After your house or car is sold at auction, if the debt is not fully paid off, the remainder of the debt becomes unsecured debt. Examples of secured debts are home mortgages, car loans, rent-to-own furniture purchases, and some jewelry store purchases. Examples of unsecured debts are credit cards, medical bills, signature loans, overdue utility bills, gym memberships, and past due rent. These unsecured debts are also called non-priority unsecured debts. Priority debts are treated differently in bankruptcy and are non-dischargeable.

How Are Secured and Unsecured Debts Treated in Bankruptcy?

In a Chapter 7 bankruptcy, on your bankruptcy petition, which is filed with the Bankruptcy Court to begin your bankruptcy filing, your secured debts are listed on Schedule D, and your unsecured debts are listed on Schedule F. After your bankruptcy is successfully completed, you will receive a bankruptcy discharge. At this point, you no longer owe your non-priority unsecured creditors. You secured creditors are treated differently, however. With secured creditors, you have two options. You can keep the property and continue to make the payments, or you can surrender the property and discharge the debt and no longer owe it. You indicate which option to choose on Schedule D of your bankruptcy petition. Surrendering the property would be the better option if you are behind on payments and cannot really afford it. If you want to keep the property, the creditor will send you a Reaffirmation Agreement for you to sign that will obligate you to keep making payments on this debt despite the bankruptcy.

Student Loans

Although student loans are non-priority unsecured debt, these are treated differently than most other unsecured debts. They are non-dischargeable in bankruptcy, and you cannot get rid of them with a Chapter 7, unless you can prove "undue hardship." This is very difficult to prove and is seldom successful. Bankruptcy courts may use the "Brunner test." Using this test, you may be able to discharge your student loan debt if you meet all three of these criteria:

  1. Poverty: If your student loan payments prevent you from maintaining a minimal standard of living.
  2. Persistence: If your present financial situation will likely stay the same for a large part of the student loan repayment period.
  3. Good faith: If you have made a good faith effort to repay your student loan, meaning you intended to repay it when you incurred the loan and honestly did try to repay it.

However, most courts do not like to discharge student loan debt.

Priority Debts Are Non-Dischargeable

Your unsecured priority debts cannot be discharged, and you will still owe them after the bankruptcy is over. These are debts that you may owe to federal, state, and local governments. These include certain tax obligations, alimony, child support, fines, and court ordered restitution payments. Priority debts are listed on Schedule E of your bankruptcy petition.

Contact Starks Law Debt Defense Attorneys To Learn More About Chapter 7 Bankruptcy Relief

If you need debt relief or have questions about Chapter 7 bankruptcy relief, contact us at Starks Law P.C. for a free consultation with an attorney. We listen to the needs and goals of every client and create a legal strategy tailored to that person and their case. We do not believe in the 'one size fits all' legal strategy employed by other firms. Every case is unique, and we plan accordingly.

Representation from Starks Law begins with a simple phone call. We will review the circumstances surrounding your unique situation. After assessing the details, we will form an action plan tailored specifically for your case and goals. Additionally, we will do our best to answer any questions you may have so that you can make a fully informed decision on how to proceed. Take advantage of our Creditor Lawsuit Defense services.