Different Kinds of Debt Are Treated Differently in Chapter 7 Bankruptcy

Chapter 7 Bankruptcy Secured & Unsecured Debt – Secured & Unsecured Creditors

 

Many people are overwhelmed with debt. And many people don’t know about the different kinds of debt.

If you are thinking about filing for bankruptcy, you need to list all your debts. And you need to describe your debts.

How do you describe debts? Debts are defined by:

 

·        How you either borrowed the money; or

·        How you bought and paid for a product; or

·        How you agreed to pay for a service.

 

Examples:

 

Home Purchase: John buys a house using a mortgage from Acme Bank. The deal between John and Acme Bank allows John to buy the house over time, but Acme Bank has a documented financial lien (interest) against the house until John pays off the debt. The home purchase is a secured debt. The mortgage is a loan which is secured by John’s house.

 

Car Purchase: Suzy needs a new car, but needs a loan to buy one. Acme Bank agrees to loan Suzy the money in exchange for a secured interest in the car. The car loan is a secured debt. The loan is secured by Suzy’s car.

Credit Card: Milo wants a credit card for emergency purchases when he does not have enough cash to buy something outright. Acme Bank offers $5,000 in credit to Milo. In exchange Milo will make regular monthly payments including a fixed interest amount to Acme Bank. Milo buys lots of things with his new credit card. Milo gets a new scooter, bedroom set, clothes and other stuff. Acme Bank does not have a secured interest in any of the things Milo bought with his credit card.

Emergency Room Bill: Jane is in a bad car accident and goes to the hospital. Even with insurance Jane has to pay over $5,000 for her health services. The hospital sends Jane a bill. If Jane doesn’t pay the bill, the hospital will have to sue Jane to get the money. The hospital does not have a secured interest in any real or personal property Jane owns so the hospital debt is unsecured debt.

So a secured debt is secured by something the debtor owns, and the debtor has personal liability to pay the debt. If you stop paying on a secured debt, the creditor can seize the property used to secure the loan. Common things used to secure a loan are a home, a car, appliances and electronics.

But an unsecured debt is not secured by any property of the debtor.

 

What’s the Difference between a Secured Creditor and an Unsecured Creditor in Bankruptcy?

Bankruptcy rules give secured creditors special treatment over unsecured creditors.

 

Secured Debts in a Chapter 7 Bankruptcy

In a Chapter 7 Bankruptcy a debtor can liquidate or wipe away debts to get a fresh start. But if the debtor has a secured car loan, the creditor can seize it.

 

Chapter 7 Debtors who are Current on Secured Debt Payments

Many times a debtor is current on the payments for a secured debt such as a car loan, and he/she needs to keep the car to get to work. If the debtor wants to keep the property, there are a few options:

Reaffirmation: You work with the secured creditor so you can keep the property. But if you fail to make the required payments, the creditor can take the property. Most importantly, you have to get the creditor to agree to reaffirmation.

Redemption: You buy the property from the creditor for a lump sum during the bankruptcy process. Unfortunately, very few debtors have enough cash to use the redemption option.

Surrender: You can give up the property which secures the debt and wipe out the debt during the bankruptcy process.  Without bankruptcy, surrendering the property to the creditor does not wipe out the debt, and a debtor could surrender the property but still wind up liable to the creditor for a deficiency judgment.  However, in a Chapter 7 bankruptcy, surrendering the item which secures the debt, be it a house, car etc., along with the protections of bankruptcy law prevents the creditor from pursuing the debtor for any loan deficiency. 

 

Chapter 7 Debtors who are Not Current on Secured Debt Payments

A debtor who cannot make his/her car payments will have a hard time saving the car. The secured creditor cannot repossess the car while the bankruptcy stay (a time period where creditors cannot try to collect) is in effect. Most secured creditors will ask the court to lift the stay to seize the property. In this common scenario courts will lift the stay and allow the secured creditor to repossess the item unless the debtor has reaffirmed, redeemed or surrendered the item which secures the loan as described above.  

 

Unsecured Debts in a Chapter 7

Bankruptcy rules don’t give any special treatment to most unsecured creditors. Some types of unsecured creditors include medical creditors and credit card companies. In many Chapter 7 Bankruptcies unsecured creditors get little or nothing in the bankruptcy process.

 

Chapter 7 Priority Unsecured Debts

Some unsecured debts have to be repaid in full such as Alimony, Child Support, Taxes, and others listed in the Bankruptcy Code. 

 

Our office can help you understand which category your debts fall into.

If you are considering bankruptcy call Schwent Law at (636) 937-4994.