Secured debt has a special status in bankruptcy. The first question most people have is “what is secured debt?” Put simply, it is any debt that is secured by property. The most common examples are homes and cars. The debt that underlies these assets is secured by the property. That is, if you don’t pay your mortgage or car payment, the mortgage company or finance company can take back the security to offset their loss.
Unsecured debt is generally represented in credit cards and personal loans. If you do not pay your credit card or personal loan, the finance companies can sue you and potentially go after things such as bank accounts, but they cannot go after whatever you purchased with the credit card or the loan. Those items were not secured by the loan.
With this background, what are issues with secured debt as opposed to unsecured debt? The biggest thing is that if you want to keep any of your property that is secured by a loan, you have to pay it or continue to pay it through bankruptcy. I often tell potential clients, “there is no such thing as a free car in bankruptcy.” This means if you don’t pay the car loan, you can’t keep the car. In bankruptcy or outside of bankruptcy if you don’t pay a secure debt, you lose the asset.
Credit cards, on the other hand, no matter what you purchased with the credit card you do not have to lose it if it was unsecured. So, if you are behind on a car loan and you are considering chapter 7 bankruptcy, you have to get the car loan current or you will lose the car. In a chapter 13 bankruptcy, you would have the opportunity to catch up the arrears over the course of the bankruptcy plan and keep the car. But, once again, only paying the secure debt allows you to keep the asset.
Contact us at 412-414-9366 if you have secured debt issues that you want to discuss, or if you were not sure whether your debt is secured or not. This may require you to get the original contract paperwork for me to review. I would be happy to discuss your situation and answer your questions.