Difference between secured and unsecured debt

Owing more than you can afford is stressful, and contemplating a Chapter 7 bankruptcy without any idea of how it works probably won’t bring relief. Though a fresh start may be just what you need, it’s important to know how clean that break from your debt will be.

Filing for Chapter 7 bankruptcy means you’ll be addressing your secured and unsecured debts, which can be a daunting step to take. Just know that if you file, you won’t be alone since 8.7 million consumers filed for Chapter 7 bankruptcy between 2005 and 2017. But it’s important to know how the court goes about granting all those new beginnings, and what you could see on the other side.

Secured debts

Secured debt means that you put up collateral on a loan. If you took out a loan for a large purchase like a house or car, that loan was likely secured using your purchase as collateral. If you file for Chapter 7 bankruptcy, your lender will probably seek compensation by taking possession of the collateral and selling it to settle your debt. If you’ve declared bankruptcy, then you might not be liable if there’s still an outstanding balance after the sale.

Unsecured debts

Unsecured debts generally don’t have any collateral set forth. Creditors looking to settle debts probably don’t have any claim to your secured property but could collect on money that remains after their sale. Once the sale of your other property is complete and the courts tally the funds left over after the sale of your secured belongings, they will usually outline the priority of your debts:

  • Priority debt: Public policy obligations like child and spousal support, outstanding taxes, criminal fines and money owed from lawsuits could claim the first slice of your remaining assets. Unlike secured loans and nonpriority debts, you may still be on the hook for the difference after bankruptcy if your assets don’t cover everything you owe.
  • Nonpriority debt: Unpaid credit cards, medical bills and personal loans could all fall under nonpriority debts. These types are generally last in line for collection. If the sale of your assets doesn’t cover the total amount you owe, you might be able to have the remainder discharged. That isn’t always an option, though, with things like student loans and certain luxury purchases sticking around after your declaration.

Defining your debt and knowing how Chapter 7 bankruptcy handles categories differently can be a complex undertaking. Making sure you know what to expect in the bankruptcy process can be an essential step to cashing in on that waiting relief.