If you have decided to file for bankruptcy, you may be ready for the debt relief this process can bring. However, before you file, it’s critical to understand the different kinds of debts and how they will be handled. Most commonly, this refers to secured and unsecured debt. If you are unsure how these differ or what will happen to them during your bankruptcy case, you’ll want to keep reading. The following blog explores what you should know about these important matters, including why it is in your best interest to work with a Memphis, TN consumer bankruptcy lawyer to represent you during these difficult times.
What Makes Debt Secured Versus Unsecured?
In general, a secured debt is any outstanding loan that is guaranteed by physical property, also known as collateral. Essentially, if you fail to pay a secured debt, the creditor can repossess the collateral property. This is often the case with cars and homes. Because these are guaranteed, they typically carry lower interest rates.
An unsecured debt, on the other hand, is any accumulation of money that is not guaranteed by physical property. This includes things like credit card debt, personal loans, and medical debt. As these do not carry collateral property, meaning the creditor will have a more difficult time recovering the funds they are owed, these tend to have much higher interest rates and often require borrowers to have higher credit scores to obtain the loans.
What Happens to These Debts During Bankruptcy?
Unsecured and secured debts are treated very differently during bankruptcy, and furthermore, each debt is handled differently based on the chapter you decide to file.
Typically, during Chapter 7, you are responsible for making regular payments on secured debts in order to keep the property, but you do have the option of surrendering it back to the creditor. During Chapter 13, which is a repayment-based plan, you’ll find that your secured creditors will be included in the repayment plan, allowing you the opportunity to catch up on the payments and retain your property. You also have the option to “cram down” your debt, which reduces it’s value to the market value of the property if it is worth less than the value of your loan.
Unsecured debts during Chapter 7 and Chapter 13 are either considered priority or non-priority. A non-priority debt means it is fully dischargeable during bankruptcy, meaning your liability for these debts will be completely removed at the conclusion of your bankruptcy case.
As you can see, navigating bankruptcy can be incredibly difficult. That is why it is imperative to connect with an experienced attorney at the Arnold Law Firm. Our team understands how complicated these matters can be to navigate, which is why our firm is committed to guiding you through these complex issues. Connect with us today to learn more about how our firm can assist you.
