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Loans and other debts generally fall into two categories: secured debt and unsecured debt. The main difference between the two is that secured debts have collateral to protect the lender (such as a home or car), while unsecured debts don’t.
If you file for bankruptcy, most of your unsecured debt can generally be discharged at the end of the process. However, secured debt is handled differently, especially if you want to keep your property.
A North Carolina bankruptcy lawyer can explain how filing for bankruptcy will affect your secured and unsecured debts.
What is Secured Debt?
Secured debts involve collateral or a piece of property that the lender can claim if you don’t pay off the loan. Common examples include:
- Home mortgages (your lender can foreclose on your home if you do not pay)
- Auto loans (your lender can repossess your vehicle if you do not pay)
- Secured credit cards (requiring a security deposit for collateral)
- Home equity loans (secured by the home’s equity)
Interest rates on secured debts are generally lower because they pose less risk for the lender.
What is Unsecured Debt?
Unsecured debts do not involve collateral. Lenders issue unsecured loans based only on the borrower’s credit score and agreement to pay them back. Examples include:
- Traditional credit cards
- Medical bills
- Personal loans
- Student loans
Due to their higher level of risk for the lender, these debts often have higher interest rates.
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What Should You Do if You Can’t Pay Off the Debts?
Both unsecured and secured debts must be repaid, or you will face consequences. If you can’t afford to pay off your debts, you have several options to consider, such as:
- Credit counseling: A professional credit counselor can analyze your income and debts, help you create a budget, and devise a plan to help you get back on solid financial ground.
- Creditor negotiations: In some situations, your creditors may be willing to let you pay off your debt for a lower amount, decrease your monthly payment, or increase the length of your loan.
- Debt consolidation: This option generally involves taking out a personal or home equity loan to pay off your other debts, thereby combining everything into one predictable monthly payment.
- Bankruptcy: While not the best option for everyone, filing for bankruptcy can allow you to eliminate some or all of your debts and get a fresh financial start.
Bankruptcy attorneys can explain the details of each of these and any other debt relief options that may be available to you so that you can make an informed decision.
It’s also important to note that some debts may not qualify to be discharged through bankruptcy, such as overdue alimony or child support, recent tax debt, and student loans. Your bankruptcy lawyer can explain if any of your debts do not qualify for discharge.
How are Secured and Unsecured Debts Handled During the Bankruptcy Process?
If you decide filing for bankruptcy is the best choice for you, you should understand how your unsecured and secured debts will be handled during the process. The results vary depending on whether you file for Chapter 7 or Chapter 13 bankruptcy.
With some exceptions, most unsecured debts are discharged in both Chapter 7 and Chapter 13 bankruptcy. However, secured loans are treated differently because of the involved collateral.
Secured Debts in Chapter 7 Bankruptcy
The Chapter 7 bankruptcy discharge eliminates your liability for debt to your lender. However, it does not eliminate your lender’s lien on your property. Because the lender still holds a lien on your house, car, or other property, you must pay off or otherwise resolve the debt if you want to keep your property.
In many cases, Chapter 7 bankruptcy filers “reaffirm” their debt for properties they don’t want to surrender. This means they continue making payments on their secured loans after the filing is complete, as if they had never filed for bankruptcy. This process can allow them to keep their home, car, etc. and help them rebuild their credit.
However, if they fail to reaffirm a secured debt, in some situations the lender could repossess their vehicle or other property.
Secured Debts in Chapter 13 Bankruptcy
According to the U.S. Courts, Chapter 13 bankruptcy filers are responsible for making monthly payments to pay off their debts over a period of three to five years.
If you file for Chapter 13 bankruptcy, many types of secured debts will usually be paid off via your payment plan. You will no longer be responsible for them after discharge.
How Bankruptcy Attorneys Can Help You Pay Off Your Secured and Unsecured Debts
If you’re struggling under a mountain of debt you can’t pay, a bankruptcy lawyer can help you in several ways. For example, they can:
- Assess your unique financial situation, including your income, debts, and assets
- Explain the differences between Chapter 7 and Chapter 13 bankruptcy, and which one you qualify for
- Answer all your questions about the bankruptcy process
- Explore potential alternatives to bankruptcy, if applicable
- Explain the benefits of the automatic stay, which prevents creditors from contacting you during the bankruptcy process
- Help you complete all required paperwork for your bankruptcy petition
- Represent you in creditor meetings and hearings
- Help you get a fresh financial start
Get Answers to Your Questions About Secured and Unsecured Debts Today
The bankruptcy process can be complicated, but our bankruptcy lawyers at Farmer & Morris Law, PLLC, are here to help you understand your options and find a way to break free from overwhelming debt. We have served over 10,000 clients and have a Google reviews rating of 4.9/5 stars based on over 415 reviews.
We offer free initial consultations, so please contact us today to learn more about secured vs. unsecured debt and get answers to all your questions.
