Debt: Secured Versus Unsecured

three dollar headsWhen you file for bankruptcy, your debt is classified as secured, unsecured priority,  or unsecured nonpriority. There are different rules for how your debt is treated depending upon its classification. Thus, it is important for you to understand what types of debt you have and how each will be treated in your filing.

A debt is secured if you pledged property as collateral for the lender. The most common examples of secured debt are home mortgages and vehicle loans. If you default on a secured loan, the creditor has the right to foreclose or repossess the asset pledged as collateral. Thus, in order to keep possession of the asset, you must generally pay your secured creditors at least the value of the collateral. You can also surrender the collateral to the lender and discharge any remaining deficiency balance.

Debt that is classified as unsecured priority debt is granted special status under the law. The most common examples of unsecured priority debts are  taxes and domestic support obligations (alimony and child support). You must typically pay these debts in full.

It is common for debtors to have numerous creditors holding unsecured nonpriority debts. Common examples of unsecured nonpriority debts include medical bills and credit card bills. In a Chapter 7 case, the majority, if not all, of your unsecured nonpriority debt is discharged or eliminated. In a Chapter 11 or Chapter 13 case, the debtor pays at least a percentage of the unsecured nonpriority debt. However, in the majority of Chapter 11 and Chapter 13 cases, unsecured nonpriority creditors are paid very little.

Please keep in mind that every case is different. If you have questions about filing a bankruptcy case and would like to schedule a no-cost consultation, please contact our office by completing the form on this website or calling us at (954) 280-5066.

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