Secured vs Unsecured Debt
Kansas City Bankruptcy Attorney Explains Dischargeable Debts
Filing bankruptcy can help you get out from under burdensome debts and get a clean start financially. However, not all debts are eligible for discharge in bankruptcy. While you can likely eliminate unsecured debt like credit card balances and personal loans, you may still owe secured debts like your mortgage and car loan. Still, even if you cannot fully discharge everything you owe, both Chapter 7 bankruptcy and Chapter 13 bankruptcy can help you regain control of your finances, making your remaining debts more manageable. We explain the differences between secured vs unsecured debt below.
A Kansas City bankruptcy attorney from The Sader Law Firm can explain the difference between secured vs unsecured debt. In a free consultation, we can examine your financial situation and determine whether bankruptcy will allow you to erase or manage your debt. Then, we can either represent you in a bankruptcy case or offer you debt relief alternatives that may benefit your unique situation.
What are Unsecured Debts? Are They Dischargeable in Bankruptcy?
Unsecured debts attach to any specific property you own. With a few notable exceptions, you can generally discharge these debts in bankruptcy. The Court appoints a Chapter 7 Trustee to review the Petition and Schedules you file with the help of your attorney. Any nonexempt assets will go to your Chapter 7 Trustee who in turn will liquidate them to pay your creditors a portion of what you owe. (Many people can exempt most, if not all, of their property.) Usually within about 120 days after the filing, the Court will process your discharge and forgive all remaining unpaid unsecured debts. If you file Chapter 13 bankruptcy, you will pay back part of what you owe through a repayment plan. At the end of this time, the courts can discharge your remaining unsecured debts.
Some common examples of dischargeable unsecured debts include:
- Credit card debt. Although you may use a credit card to purchase property, there is usually no collateral for the card itself. Therefore, most credit card debt is unsecured and fully dischargeable in bankruptcy.
- Medical debt. One of the most common reasons people file bankruptcy is because of unmanageable medical debt. However, hospital bills and other similar debt are eligible for a bankruptcy discharge.
- Personal loans. Unsecured debts include loans that you obtain from a person, bank or other financial institution (excepting a mortgage or other loan secured by collateral).
What Exceptions Exist for Unsecured Debts?
The Student Loan Exception. Technically, student loans are unsecured debts since they are not related to any physical property. However, special rules apply to student loans in bankruptcy, meaning that they are usually not eligible for discharge unless you meet certain hardship requirements. There are different rules in place for hardship discharges depending on which Bankruptcy District you live. Each state has its own criteria for a hardship discharge, but, in general, you must prove that it is unlikely you will ever be able to repay your student loans.
The Tax Debt Exception. Like student loans, unpaid tax debt is also often unsecured but is not always eligible for discharge by filing bankruptcy. Generally, you can eliminate only income tax that meets all IRS requirements for tax debt discharge.
The Child Support and Spousal Support Exception. Although these loans are unsecured, they are not dischargeable in bankruptcy.
Can You Discharge Secured Debts When Filing Bankruptcy?
Secured debts directly tie to collateral (tangible property you own). If you fall behind on these loans, your creditor can repossess the property to settle the debt. For this reason, secured debts are not dischargeable in bankruptcy, unless you surrender the collateral. Any remaining debt is then unsecured and eligible for discharge. Alternatively, you can use a Chapter 13 repayment plan to settle secured debts.
Some common examples of secured debts that are generally nondischargeable include:
- Mortgage. Your house is the collateral in a mortgage agreement with a bank. This means you cannot eliminate a mortgage or missed mortgage payments in a bankruptcy discharge. If you do file bankruptcy, then you must be current with your mortgage payments by the end of the bankruptcy process to keep your house. However, a Chapter 13 repayment plan can often help you do this while also eliminating other burdensome debts. If you have a second mortgage, there are special rules in Chapter 13 that could allow you to avoid the mortgage. Make sure to ask your attorney about this.
- Car loans. You cannot fully eliminate your car loan except through repossession or surrendering the car. However, you can often significantly reduce what you owe against your car in a Chapter 13 cramdown.
- Financed property. If you purchased any kind of property on an installment agreement, the store or company may have a claim against that property if you are behind in your payments. Further, certain store credit cards are secured with the collateral being anything purchased at that store.
- Liens and money judgements. Sometimes, if you fall too far behind on an unsecured loan, the creditor may obtain a judgment against you and then place a lien on your property. Essentially, a lien turns an unsecured debt into a secured debt. You cannot discharge a lien by filing bankruptcy. Instead, you must pay the full value of the debt. However, the Chapter 13 repayment plan can help you do so.
Questions on Secured vs Unsecured Debt? Contact a Kansas City Bankruptcy Attorney
Many people who are struggling with unmanageable debt may not know what kinds of debts they owe. A Kansas and Missouri bankruptcy attorney from The Sader Law Firm can examine your finances and explain your best options for debt relief. If you owe mostly unsecured debts, Chapter 7 or Chapter 13 bankruptcy can give you a fresh financial start. Otherwise, Chapter 13 bankruptcy can help you eliminate some debts and get current with payments on others. If you are facing foreclosure, repossession or collection actions, contact our Kansas City law firm today to find out how we can help.