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Secured vs. unsecured debts

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Updated: 4/13/2007 6:35 pm
When you file for bankruptcy, you’ll be asked to designate each of your debts as either secured or unsecured. This is important because it will determine what rights creditors will have in getting their money back. If a creditor has secured a debt with you, it means that you signed an agreement that allows the creditor repossess certain collateral should you not pay back the loan. In most cases, the collateral will be the property you’re purchasing, like a house, car, furniture, or inventory for a business. Sometimes, you can agree to put up property you already own as collateral for a new debt. In either case, when you file bankruptcy, the secured creditor can choose to take the property from you and sell it to recover its money. If you want to keep the secured property, you either have to pay its total market value to the creditor or continue making your payments on the loan through a reaffirmation agreement. It’s important to note that in order to be eligible to file Chapter 13, the total amount of your secured debts must not exceed the limit imposed by the law. The amount of unsecured debts you can claim will also be limited in a Chapter 13, but in general, they’re treated very differently in a bankruptcy case. An unsecured debt is, as the name suggests, any debt in which a creditor doesn’t secure any collateral from you when approving a loan. Examples include medical and utility bills, credit card debts, and signature loans. Generally, all unsecured debts can be discharged in a bankruptcy except alimony, child support, recent taxes, criminal penalties, and certain educational loans. As a result, the first thing to consider when filing bankruptcy is whether or not you have enough unsecured, dischargeable debts to benefit from bankruptcy. If you’re filing just to get rid of student loans, taxes, or several secured debts, you may find yourself in a worse position than you were before the bankruptcy, as these debts are not easily discharged or may result in the loss of valuable property. To figure out whether a certain debt you have is secured or unsecured, you can simply look at the original agreement you signed for the loan and see if you’ve pledged collateral to get the loan or have some sort of lien associated with the debt. Determining which of your debts are unsecured or secured can help you decide if filing bankruptcy, and under which chapter, is the right decision for you.
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