What kinds of debts are there?

What kinds of debts are there?

On Behalf of | Sep 15, 2021 | bankruptcy |

If you’re considering bankruptcy, one of the things you need to understand is the kind of debt you’re in. Not all debts are the same.

There are two main debt categories. Those are unsecured debts and secured debts. Here’s what you need to know about them and how they could affect your Chapter 7 or 13 bankruptcy.

What is an unsecured debt?

Unsecured debts are not collateralized, which means that they are not secured by holding collateral. That means that if you don’t pay back the debt, the lender isn’t going to have much protection against that default. Instead, they will report the default to credit rating agencies, sell off the loan to credit collection agencies or to a secondary market and try to get that debt repaid through the court.

With an unsecured debt, you don’t pledge any asset as collateral for the loan.

What is a secured debt?

A secured debt is different because you do pledge an asset in exchange for taking out a loan. For example, some common secured debts include mortgage or auto loans. If you default on the payments for those loans, then the bank or lender could seize your asset, your home or vehicle, to sell it and cover the debt.

With a secured loan, you could have more to lose. Defaulting on your car loan may result in a repossession. Defaulting on your mortgage could result in a foreclosure.

How are different debts handled in bankruptcy?

Both secured and unsecured debts can be discharged in bankruptcy.  However, if the debt is secured, and you want to retain the collateral, such as your car or home, you will probably reaffirm the debt. If you reaffirm, then you are once again liable for the debt. You should not reaffirm unless you are sure you can make the payments.

If you are behind on your mortgage or car loan and want to keep those items, you may need to file a Chapter 13 payment plan which would allow you to catch up over an extended period of time.