What is the difference between secured debts and unsecured debts?

Unsecured debts are not legally bound to any assets you own, while secured debts are protected by a voluntary or involuntary lien on either personal or real property (known as collateral). These debts are addressed differently during the bankruptcy process, and knowing the difference between these types of debts is essential to understanding how bankruptcy can help you rebuild your life.

While unsecured creditors often face little chance of repayment, secured creditors have certain rights related to their specific collateral. An experienced attorney can help you understand the nuances between secured and unsecured debt and the impact both can have on your Salt Lake City bankruptcy case.

Secured Debt

Secured debts are, in essence, “guaranteed” by a form of personal or real property. If you default on that debt, the creditor could repossess your property to satisfy the debt. The most common types of secured debts in the bankruptcy process are car loans and home mortgages.

Another fairly common but often overlooked secured loan is the “purchase money security interest” (PMSI). A PMSI is automatically created by law when you buy goods from a merchant, such as an appliance or furniture store, using “in-house” financing. A PMSI is born, whether the merchant or its financing affiliate is the actual lender.

Finally, there are involuntary secured debts. A money judgment recorded in the official records of the county in which you own real property creates a judicial lien on that property, but only to the extent the lien does not “impair your homestead exemption.” Likewise, the IRS can record a tax lien, which creates a security interest in just about all equity you have in real and personal property. YIKES! If you anticipate either a judicial lien or tax lien, you need to immediately speak with an experienced bankruptcy lawyer. The automatic stay will usually stop an involuntary lien before it happens.

While the obligation to pay back a secured debt can be discharged or erased by filing bankruptcy, the secured creditor maintains the right to take back the secured property. For this reason, there are several ways to deal with a secured creditor in bankruptcy:

  • You can agree to continue to pay the debt according to your original contract terms, known as “reaffirmation.” It is available in both Chapter 7 and Chapter 13, with slight variation.
  • You can stop paying the debt and give the creditor the collateral, known as “surrender.” This option is also available in both chapters, again with slight differences.
  • In Chapter 7, you can force your creditor to accept the fair market value of the collateral, known as “redemption,” but you must pay the value in one lump sum within 30 days.
  • In Chapter 13, you can reamortize the entire balance owed over the life of the plan at a low rate of interest. This solution is perfect if you are behind in car payments or paying a high interest rate. In several instances, you can even reduce the balance owed down to the fair market value, known as “cram down.”
  • When you are behind in your home mortgage payment, Chapter 13 allows you to bring the past-due balance current over 36 to 60 months at zero percent interest. At the same time, you resume paying your regular monthly mortgage payment directly to your lender.
  • To the extent, an involuntary lien impairs your right to use a Utah exemption, or the property is already collateral for another secured creditor, you can file a motion to avoid the lien in either Chapter 7 or Chapter 13.

As you can see, there are many successful strategies for dealing with your secured debt in bankruptcy. The best part is that you are the one in control, not your creditor.

Unsecured Debt

A debt is unsecured if it is not tied to any collateral. The most common examples include medical debt, credit card debt, and personal loans. Because these debts are not secured by collateral, a creditor can’t seize any property from you to offset the debt they are owed, unless and until they obtain a money judgment from a court of law.

In Chapter 7 cases, unsecured creditors are paid money only to the extent you own assets that exceed your Utah exemptions. In Chapter 13 cases, unsecured creditors receive over the life of your Chapter 13 Plan, the greater of:

  • What they would have received had you filed a Chapter 7 bankruptcy, known as the “liquidation analysis.”
  • The amount of leftover money you have every month after paying all taxes, secured creditors, and household expenses, known as your “disposable monthly income.” For many, this amount is zero.

There are other considerations about unsecured debts covered elsewhere on our website, such as whether an unsecured debt is non-dischargeable or a priority debt or administrative expense.

Discuss Your Secured and Unsecured Debts with a Salt Lake City Bankruptcy Attorney

Now that you know the difference between secured and unsecured debts and how you can address them in a bankruptcy case, you should consult with a trusted lawyer to create a strategy utilizing a combination of the solutions discussed here. Expert advice ensures you are maximizing the value of bankruptcy and putting your financial future back on track. A Salt Lake City attorney can review your debts and advise you on which ones are secured or unsecured. Call today to speak to a qualified professional and learn more about your options.

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