Unsecured debts are not backed by collateral. That is, the creditor is not given a lien on anything you own. If the loan is not paid, the creditor may be free to pursue a judgment against you; however, they will be unable to take or repossess anything you own. Credit cards, medical bills and most payday loans are examples of unsecured debts. Interest rates on unsecured loans are often higher than the rates on secured loans.
Secured debt is backed by an asset. The creditor is given a lien on something you own. If the loan is not paid, the creditor has the right to not only sue you personally, but also repossess the collateral (property) that secures the loan. Examples of secured loans include mortgages and car loans. Secured loans obtained to help you purchase property are often referred to as enabling loans or purchase money loans. Other times, you may already have the collateral when you incur the loan and pledging property such as your car or household items may be required under the loan agreement. These loans are often called non-purchase money loans.
How are secured and unsecured debts treated in bankruptcy?
Chapter 7 Bankruptcy allows debtors to discharge both unsecured and secured loans. Unfortunately, if the debtor chooses to not pay his/her secured loan payments, the lender will still retain their lien and have a right to repossess their collateral. Chapter 7 debtors who wish to keep the collateral sometimes do so by entering into a reaffirmation agreement with the creditor. This agreement excludes the loan from the bankruptcy discharge. The collateral can also be retained without reaffirmation if the Debtor is current on the loan payments at the time the bankruptcy case is filed and remains current on future payments that come due.
Unsecured debts can also be discharged through Chapter 13. Whether a debtor must repay a portion of their unsecured debt or all of it will typically depend on their income and non-exempt assets. However, unlike Chapter 7, Chapter 13 can allow debtors to alter the re-payment terms of secured loans. For example the rates on these loans can be lowered. Chapter 13 can also be used to cure a default on a secured debt, such as a default on your home mortgage. If you are faced with a pending car repossession or home foreclosure and wish to keep the collateral, Chapter 13 will be a better option for you than Chapter 7.
Under Chapter 13, modification of non-purchase money loans can be easier than purchase money loans. Further, Chapter 7 does allow you to eliminate non-purchase money liens on household goods.
If you have more questions about secured and unsecured debts and how bankruptcy can help you, call Milwaukee Chapter 7 and Chapter 13 Bankruptcy Attorney Andrew Sapinski.