When you’re filing for bankruptcy, the final disposition of your debts will be determined in part by the type of debt you have. There are several different classifications of debt for the purposes of a bankruptcy proceeding, and each has its own set of rules. Types of debt may include priority, non-priority, secured, or unsecured. Secured debt is a repayment obligation where the creditor retains an interest in some kind of property that they can seize and sell in the event of nonpayment. In other words, the debt is secured by collateral.
There are different types of secured debts, otherwise known as liens. Some of the most common are loans for homes and cars. When you take out a loan to buy a house or car, you sign a security agreement which contractually grants a lender a security interest in the property. If you fail to pay on your loan, the lender has a right, based on that security interest, to seize the property, sell it, and then sue you for the difference between the sale price and your remaining obligation. Another example of a secured debt is a security deposit sometimes used to open or extend a line of credit. A person may contract to give a lender a security interest in any other type of property or asset, including furniture, inventory, and even cash.
Some security interests are imposed involuntarily. This happens when a lien is put on your property by matter of law. Involuntary liens can happen for a variety of reasons, including failure to pay taxes, or in satisfaction of some other civil judgment against you. A Cleveland debt relief attorney can further inform you on security interests.
Secured creditors are in a better position to collect on their debts than unsecured creditors. If you owe an unsecured creditor money, they must go to court and receive a judgment in their favor to begin seizing any assets in order to satisfy your obligation. A secured creditor already has the right to do so, and must only go about seizing property peaceably and lawfully, according to the terms of your agreement and the laws of the relevant jurisdiction.
How your secured debts will be handled in bankruptcy depends first on the type of bankruptcy you file.
- Chapter 7: In a Chapter 7 bankruptcy, dischargeable secured debt is usually discharged. That means you’ll no longer be obligated to pay your creditor for the debt. However, a secured creditor’s security interest is usually NOT discharged in a Chapter 7 bankruptcy. This means even though you’re no longer obligated to pay the debt, the creditor can still repossess the collateral property if you do not.
- Chapter 13: In a Chapter 13 bankruptcy, you can deal with secured debt by either surrendering the collateral property or continuing with payments as per your security agreement. If you surrender the collateral property and still owe a balance to the creditor, that amount will become unsecured debt and will be paid slowly and at a discounted price through your Chapter 13 repayment schedule. If you want to keep the property, you will add the debt to your repayment plan and make payments on it with the rest of your bankruptcy debt.