Secured & Unsecured Debt

If you plan to file for bankruptcy, it’s important that you understand the difference between secured and unsecured debt.  In a bankruptcy, secured debt is usually treated differently compared to unsecured debt.  Therefore, it’s important that you understand what type of debt you have and how it affects your bankruptcy case.

Let’s begin by looking at secured debt.  Secured debt is debt that is linked to some type of collateral that the creditor can claim if you default.  For example, your mortgage is considered secured debt since your house is used as collateral for the loan.  If you default on your mortgage, your lender can claim your home.  Other types of secured debt include car loans, boat loans, and computer loans.  Another type of secured debt would be a lien placed against your property by a 3^rd party.  For example, if you didn’t pay your taxes, the IRS could place a lien against your property.  The lien would prevent you from selling or transferring the property without paying your tax debt first.  Contractors who are not paid by homeowners can also place a lien against your property.  This lien would also be considered secured debt.

In comparison, unsecured debts are not backed by collateral or real property.  Unsecured debts include credit card balances, student loans, attorney fees, medical bills, rent payments, utility payments, and gym memberships.  During a Chapter 7 bankruptcy, the court may place a temporary hold (called a “stay”) on your creditor’s attempts to collect on unsecured debt, while allowing creditors with secured debt to pursue collection.  This means that a secured creditor may take action such as foreclosing on your property, seizing your car, or garnishing your wages in an attempt to collect on the debt you owe.

Unsecured creditors must wait and hope that the bankruptcy trustee doles out enough money (through liquidation of your assets) to cover the amount of the debt owed to them. The rules governing which unsecured debts get paid off first are complicated.  However, priority unsecured debts typically are paid off first, before general unsecured debts.  Examples of general unsecured debts include: cash advance loans, medical bills, and unsecured credit card debt.