Bankruptcy treats secured and unsecured debt differently. So, it is important to correctly define which kinds of debts you have before you file for bankruptcy.
The fundamental difference between secured debts and unsecured debts is that if you have a secured debt, the creditor has some kind of security interest backed by collateral that it can take back if you fall behind on your monthly payments. An unsecured debt has no collateral behind it.
In this post, we discuss these two forms of debt and how the United States Bankruptcy Code treats each of them, along with any specific rules in Arizona bankruptcy law.
To learn more about how a Chapter 7 or Chapter 13 bankruptcy can help you resolve secured and unsecured debts, call the experienced Arizona bankruptcy lawyers at Stone Rose Law at (480) 739-2448.
A secured debt is backed by real or personal property as collateral. An example of a secured debt backed by real property is when you buy a home with a mortgage. An example of a secured loan backed by personal property is when you finance an automobile purchase with a car loan.
If you default on your mortgage payments, the lender can enforce its lien on your home and initiate legal proceedings to take the house back through foreclosure.
If you fail to keep up with your car payments, the car loan lender can take the car back through repossession.
After the foreclosure or repossession, the house or the automobile can be sold. If the sale results in a net loss after paying off the balance of what you owe, the lender can obtain a deficiency judgment against you for the difference, with two exceptions:
A secured debt can be voluntary or involuntary.
A Chapter 7 bankruptcy is also known as a liquidation bankruptcy. The importance of this consideration rests on whether you want to keep property that serves as collateral for secured debts.
If you are not current on your home or auto loan, a Chapter 7 bankruptcy will not necessarily prevent creditor repossession or foreclosure. The automatic stay will put a halt to such actions, but creditors can make a motion with the bankruptcy court to set aside the stay.
If you want to keep your property like your car, you need to make up the missed payments and fees associated with default and resume your regular payments.
If you do not want to keep the property or you cannot keep making payments on the debt, you can surrender the property in at least partial satisfaction of the debt.
If you have equity in your home that is protected by an applicable exemption under Arizona’s bankruptcy laws, you can reaffirm the mortgage debt and retain your property. Reaffirmation is generally not required to keep your home mortgage as long as you are current with your payments.
When you reaffirm a debt, such as your mortgage or auto loan, you agree to still owe the debt after your bankruptcy case is over. The lender’s lien on your property and your personal liability for the debt remain as though you had never filed for bankruptcy.
If you cannot make your mortgage or auto payments, the creditor can foreclose or repossess your property.
Reaffirmation can be used with any type of lien, but your lender must agree to any new terms. You must also keep up with your current payments.
Another possible choice to keep your tangible, personal property used for personal or household purposes is through redemption. Redeeming property means you effectively buy it back from your lender with a replacement value lump sum, which can be less than what you owe on the existing loan.
If the amount you owe is significantly more than the property’s value, an advantage to redemption is that the lender must accept the replacement value.
Debtors who want to keep assets and property that would otherwise be subject to Chapter 7 liquidation often choose Chapter 13 bankruptcy.
Chapter 13 works by repaying creditors through a debt repayment plan that lasts three to five years. Most personal property subject to secured loans becomes subject to the payment plan, but home mortgages often continue outside the repayment plan.
Chapter 13 offers some important advantages if you are having trouble keeping up with secured debts:
As the term suggests, a creditor who offers you financing or a loan with no collateral to recover from you is an unsecured creditor. If you stop paying on the unsecured loan, your lender or creditor cannot take anything from you until it obtains a court judgment against you.
Common examples of unsecured debts and unsecured loans include:
Unsecured debts take different forms, including priority debts and administrative debts. These classifications can affect which creditors are entitled to repayment ahead of others.
A priority debt is one that gets paid ahead of most others. Section 507 of the U.S. Bankruptcy Code identifies some kinds of priority unsecured claims, including:
You can think of administrative debts as a subset of priority debts. These are typically services and goods provided to the bankruptcy estate while the bankruptcy is in progress, like any attorney fees from your bankruptcy lawyer or other professionals.
Creditors with general unsecured claims do not have priority. These debts are usually discharged at the end of either a Chapter 7 or Chapter 13 bankruptcy case.
A Chapter 7 will completely discharge most unsecured debts. A few exceptions to this general rule are:
Priority debts, such as child support, spousal support, and tax debts, are paid first. Once your secured and priority unsecured debts are paid, any remaining funds will be distributed to your other unsecured creditors.
When you file for Chapter 13 bankruptcy, how much of your unsecured debts you will repay depends on how much money you have left over each month after you have paid your normal living expenses, your secured debt payments, and your priority claims.
Your unsecured creditors must receive at least as much as they would have received if you had filed for Chapter 7 bankruptcy.
As we have shown above, if you need to seek relief from seemingly insurmountable financial obstacles, then the kind of debts you owe is an important consideration as to how much you owe. This is important when you are deciding whether to use Chapter 7 or Chapter 13 bankruptcy.
At Stone Rose Law, our experienced Arizona bankruptcy lawyers can help you understand your debt situation so you can make the best decision given your unique debt situation.
We will analyze your secured and unsecured debts to determine whether you want to keep your property or relinquish it for a fresh financial start.
We will provide you with top-tier legal guidance through the entire bankruptcy process, from gathering the information you need to file your petition to representing you in the creditors’ meeting, putting together a proposed repayment plan if applicable, and handling all matters that may come up with secured creditors, the bankruptcy trustee, or the bankruptcy court judge until your case is discharged or dismissed.
You can reach us by phone at (480) 739-2448 or use our contact form. If you need more information on how bankruptcy treats different kinds of debts, then check out our Bankruptcy Calculator.
