Understanding the difference between secured and unsecured debts is central to understanding the bankruptcy process. Chapter 13 and Chapter 7 Bankruptcy treat secured and unsecured debts differently. Secured debts generally survive the bankruptcy process, whereas unsecured debts are typically wiped away at the end of the bankruptcy.
Often, whether a debt is secured or unsecured can be complicated and can depend on your individual situation. If you are considering filing for bankruptcy, it is important to contact a Bankruptcy Attorney for advice on how your debts will be treated in bankruptcy and whether bankruptcy is a good option for you.
Secured debts are debts that are secured by a creditor’s interest in the debtor’s property. This property is called “collateral.” Typically, a security interest is created by a signed security agreement. The security agreement gives the holder the right to repossess the collateral under certain conditions.
For example, a mortgage on real property will generally be accompanied by a security agreement giving the lender the right to repossess the property if the borrower fails to make mortgage payments. However, some security interests, such as a purchase money security interest, do not require a signed agreement.
Collateral for a secured debt can include:
Unsecured debts are simply debts where there is no security interest. The most common example of an unsecured debt is credit card debt, but medical debt, legal bills, and personal loans are also common types of unsecured debt.
Non-priority, unsecured debts are wiped away at the termination of a Chapter 7 Bankruptcy; however, secured debts can be treated differently depending on whether the debtor is current on his or her payments.
For Debtors Who Are Current on Their Payments
In a Chapter 7 Bankruptcy, a debtor who is current on their secured debt payments has the option to surrender it to the secured creditor in payment of their debt or to hold on to the property and reaffirm the loan. If they reaffirm the loan, the secured debt will survive the bankruptcy process.
For Debtors Who Are Not Current on Their Payments
If a Chapter 7 debtor is not current on his or her payments, the debtor will likely have to surrender the property or catch up on payments. Although bankruptcy’s automatic stay may protect the property for a time, the creditor can petition the bankruptcy judge to lift the automatic stay.
Similar to in Chapter 7 Bankruptcy, a debtor who files for Chapter 13 has the option to surrender the property or to include the payments on the secured debt into their payment plan and continue the contract.
However, a Chapter 13 debtor may also have the option to “cram down” a secured debt. In many instances, a debtor owes more on a debt than the value of the secured asset. A Chapter 13 cram-down can take secured debt in excess of an asset’s value and transform it into unsecured debt.
For example, a second mortgage may be entirely unsecured because the home has less value than the first mortgage (although a first mortgage that is under-the-water may not be crammed down). Likewise, a loan on a car that was purchased more than 30 months before the bankruptcy may be crammed down.
Prior to filing for bankruptcy, it is crucial to determine which of your debts may be forgiven in bankruptcy and which will stick with you. Our attorney has years of experience in helping debtors through the bankruptcy process. Call the Law Office of Melanie Tavare at 510-255-4646 or contact us online to find out if bankruptcy is a good choice for you.
The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
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