Bankruptcy can provide relief to individuals buried in all sorts of debt, including consumer loans, mortgages and car loans. Since these debts are dealt with differently, depending on what type of bankruptcy for which a filer is eligible, filers should carefully review their debt situation with a lawyer.
The Difference Between Secured and Unsecured Debt
There are two different types of debt: secured and unsecured. Secured debt is debt backed by physical collateral, like a house or a car. This means that creditors are able to repossess property if someone defaults on his or her loan. Examples of secured debt include mortgages and car loans.
Unsecured debt is backed by an individual's promise to repay the loan, not collateral. When someone defaults on unsecured debt, creditors are not able to collect collateral. Examples of unsecured debt include credit card and medical debts.
How Chapter 7 Bankruptcy Treats Debt
Chapter 7 bankruptcy is a way for filers who are unable to repay any or all of their debts to get a fresh start. Chapter 7 bankruptcy liquidates a filer's non-exempt assets to help repay creditors and then discharges the remaining value of unsecured debts.
Chapter 7 filers are able to choose what happens to their secured debt. Filers may choose to have the collateral, like a house or car, repossessed by creditors, affirm the debt and continue to make payments on the loan or pay the creditor a sum equal to the replacement value of the property. This decision must be made before debts are discharged, however, to avoid creditors seizing the property after the bankruptcy process is complete.
How Chapter 13 Bankruptcy Treats Debt
Unlike Chapter 7, which wipes out most debts, Chapter 13 creates a repayment plan for filers. Chapter 13 bankruptcy, also known as the wage earners plan, helps filers struggling with their debts but still able to pay all or part of their debts develop a reasonable way to repay creditors. Under Chapter 13, the amount needed to be repaid to creditors depends on how much filers owe and the difference between what is owed and what the creditors would have received if the filer was eligible for Chapter 7 bankruptcy.
Individuals with unsecured debts less than $360,475 and secured debts less than $1,081,400 are eligible for Chapter 13 bankruptcy. It may be possible for Chapter 13 filers to keep secured debt property if these debts are incorporated into the filer's repayment plan.
For those buried in debt, bankruptcy can provide financial relief and a chance to start fresh. To see what type of bankruptcy is appropriate for your situation, contact an experienced bankruptcy lawyer.