Secured/Unsecured Debt

Whether a debt is a secured debt or an unsecured debt can make a big difference in a bankruptcy case.  Most times, a secured debt must either be paid or property returned.  Unsecured debt, on the other hand, is generally discharged after receiving only a portion of the debt paid.  In many cases, unsecured creditors receive very little to nothing in a bankruptcy case.

What does it mean to be a secured debt?  A debt is secured if there are specific assets (collateral) that a specific creditor can take if the debt is not paid.  The best example of a secured debt is the mortgage.  If someone does not make their house payments, the mortgage company can generally try to foreclose on the house.  Another example is an auto loan or title loan.  If the payments are not made, the lender may generally repossess the car.  Some secured debts are less obvious.  Store credit cards generally provide that anything you buy at that store with the store’s own credit card become collateral for the debt on the store credit card (like Bust Buy).  The same applies to credit received through the store (think Conn’s).  Secured debts can also be created by putting up your belongings for collateral for a cash loan (loan companies).

What debt is unsecured?  Basically, all debts that are not secured are unsecured debts.  Generally, credit cards issued by banks are unsecured loans.  The same usually goes for lines of creditMedical debt is also generally unsecured.  These are just some examples.

Why does it matter?  If a debt is secured, and you file bankruptcy, you must determine if the collateral for the debt (house, car, timeshare, TV, …) is something you want to keep, or something that you will let the creditor have.  In Chapter 7, you must file a Statement of Intention, stating how you plan to deal with each secured debt.  In Chapter 13, you will file a payment plan that states your intentions.  If a debt is unsecured, it goes to the end of the line to receive a share of the funds, if any, that are available to that group of creditors.

What about debts secured by household goods that I had before the debt?  There are two basic types of these debts.  First are cash loans for which you put up your household goods as collateral.  The second are called judicial liens: basically a judgment against you for which a court has issued an “abstract” of judgment. These two types of secured debt are a in special group of secured debt that may be changed to unsecured debt in a bankruptcy case.  Make sure you tell your lawyer if you have anything like this.