Differences Between Secured and Unsecured Debt
When considering bankruptcy, the most meaningful difference between unsecured and secured debt is that unsecured debt can be discharged. Secured debt can be discharged, however, any lien on the asset still remains. Basically, this removes the contractual obligation to pay for the asset is eliminated, however, you still own the asset subject to a the lien. There me be other options available for certain types of secured debt, like cram down.
A secured debt is a debt where the debtor uses an asset as collateral for the loan. If you do not make payments on the debt as required the lender can take possession of the collateral and sell the item to recover losses if the item is not reaffirmed within 45 days of the 341 hearing. Until this time, an automatic stay generally protects the debtor from collection or repossession efforts, unless the creditor sucessfully obtains a motion for relief. The most common examples of this type of loan are a car or property. Very often the loan is a purchase money security interest, which simply means that the loan is secured by the item that you are purchasing, meaning, if you purchase a car from a dealership with a loan the car is collateral and can be repossessed if you do not pay in accordance with the loan.
When an individual has equity in a house or other property it is often possible to take out loans on that equity. When taking out a loan on equity that debt is considered secured by the home or property in which you had equity, thus not a purchase money security inserest, regardless of what you spend the proceeds on. Meaning, if you take out a loan based on equity in a house to purchase new furniture for your home that loan is secured by your house. In the event that you do not make payments on the loan the creditor could attempt to foreclose upon your house. It is important to remember that even a second mortgage holder may forclose upon your house.
There are many types of secured debt, including, mortgages and liens. These types of voluntary secured debts are created by agreement of the debtor and the creditor. It is also possible to have secured debt that is involuntarily created, like a mechanics lien. Mechanics liens can attach with the consent of the title holder under limited circumstances where property value has been increased by work or materials that have not been paid for by the debtor. In some courts, depending on both the court and county in which you reside, judgments create liens that may not be dischargable in bankruptcy.
Conversely, unsecured debt is a general debt not attached to specific collateral. The lender cannot take possession of assets to satisfy the debtor’s obligation. Common examples of unsecured debts include signature loans, personal loans, credit card debt, and pay day loans. It is possible to discharge unsecured debt through bankruptcy. Generally most unsecured debts can be discharged through a Chapter 7 bankruptcy, with the notable exception of student loans. Even in a Chapter 13 bankruptcy proceeding, depending on the individuals disposable monthly income as calculated by the means test, it may still be possible to eliminate some or all of the unsecured debt.
If you still have questions, make an appointment to speak with a St. Charles and St. Louis Bankrupty Attorney today!