Secured Vs. Unsecured Debts? Why It Matters

The difference between secured and unsecured debt

Managing expectations is one of the most important jobs of a bankruptcy attorney. Attorneys need to inform prospective clients so they can make rational, fact-based decisions. It is crucial understanding the difference between secured vs unsecured debts especially when it comes to deciding which type of bankruptcy to file.

Secured debts:

This type of debt is where the Creditor has a lien on a particular piece of collateral. The most common examples are Auto Loans, Mortgages and Title Loans. Some retailers issue charge cards with language that grants them a security interest in the items purchased. The most common is Nebraska Furniture Mart, Furniture Mall of Kansas and Kay / Zales Jewelers & Helzberg Jewelry. Chapter 7 handles secured differently than in Chapter 13. In Chapter 7 you either surrender the collateral and wipe it out or keep it and pay for it. You must reaffirm the debt if you decide to keep it. Reaffirmation excludes the debt for discharge. If you reaffirm on a vehicle and the engine blows up the day after discharge you are stuck with it. Creditors rarely modify the contract to lower the interest rate or extend the duration of the loan. It is probably not in your best interest to file Chapter 7 if you are behind on a car payment or in default of your mortgage unless you intend to surrender the collateral. Chapter 13 bankruptcy allows debtors to modify the payment agreement of the secured debt. You may want to file Chapter 13 if you have a high interest rate car loan, title loan, or are facing repossession or foreclosure.

Unsecured debts:

This type of debt is where the Creditor does not have a lien, or ownership interest in your property or collateral. The most common examples are student loans, credit cards, medical bills, signature loans, payday loans. Tax debts and domestic support obligations like child support also fall into this category. Creditors generally cannot take property if you default on payments. Unsecured debts are divided into two categories: dischargeable and non-dischargeble. You can wipe out dischargeable debts while non-dischargeable debts survive.

Secured vs. Unsecured debts? Why It Matters

One simple trick to know if a debt is secured vs. unsecured is whether you pledged collateral to get the loan. Once you determine this, you can make an informed decision between Chapter 7 and Chapter 13. If you have questions, please give us a call at 785-727-7700 for a FREE Consultation over the phone, in person, or you can email us now.