Secured vs. Unsecured Debts: What’s the Difference

When you file bankruptcy you’re required to provide a list of everyone to whom you owe money. Those people and businesses are your creditors. There are separate sections in your bankruptcy petition for creditors that are secured and unsecured.
A secured debt is one that is backed by collateral. This means that if you don’t pay the debt, the creditor can repossess something, typically a car or house, to help pay what is owed. If the collateral is sold for less than what is owed, the debtor must pay the difference. This is called a deficiency.
Unsecured debt doesn’t have collateral like secured debt. It’s security is the creditor’s ability to damage the debtor’s credit. This includes items like, medical bills, signature loans and most credit cards. Occasionally, a credit card will attempt to collateralize the item purchased using the card, such as furniture or jewelry.
Unsecured creditors are typically discharged with no payment in a Chapter 7. The only time an unsecured creditor will get paid out in a Chapter 7 is when the filing debtor had some kind of non-exempt property to surrender to the trustee for liquidation. Secured creditors can be made unsecured in Chapter 7 by surrendering the collateral back to the creditor. If payments are current, a debtor may choose to keep paying on a secured debt by reaffirming it.
Chapter 13 cases allow a debtor to catch up on late payments on secured debts. Unsecured creditors get paid a portion of what they’re owed, depending on the financial situation of the debtor. There are also situations where secured debts can be “bifurcated” or divided into two debts, a secured and unsecured portion. This can be hugely advantageous if the debtor is paying very little toward unsecured creditors.
Finding out what debts will remain paid or unpaid is vital to creating a successful bankruptcy plan. contact a Jacksonville Bankruptcy Lawyer or call us at (904) 685-1200 for a free consultation.