Secured And Unsecured Debt In Bankruptcy
Unsecured Debt (Green Button)
Unsecured debts are considered low-priority debts. Unsecured loans have no collateral, and therefore the creditor has no ownership interest in the product sold to you. Unsecured debts are mere promises to pay, and the product purchased on such terms is not subject to repossession.
Another reason unsecured debts lack value to the creditor is that unsecured debts are usually discharged under bankruptcy, and the debtor is, therefore, under no legal obligation to repay the debt.
Secured Debt (Red Button)
The most common form of secured debt is your mortgage. Each state has its laws governing the foreclosure process. See our section on State Foreclosure Laws for a better understanding of the process.
Generally, lenders secure their loan by obtaining a lien (ownership interest) on the item(s) you purchased from them.
To secure the loan, a creditor must do certain things to perfect their lien. The borrower must first agree in writing to give the lender a secured interest in the item purchased.
The lender then needs to follow the laws in their state that require giving public notice of the creditor’s secured interest in the item purchased.
Secured Loans
Loans for the sale of “goods” such as business office equipment are generally governed by Article 9 of the Uniform Commercial Code under the heading collateralized debts. This area of law regulates all secured transactions involving the sale and purchase of goods.
Those lenders who have properly perfected their lien under their respective state laws are considered “secured” creditors. Under most circumstances, if you, as a debtor, default on a secured debt, the lender can repossess the guaranteed item and resell it.
Most Car Loans Are Secured
Car loans are secured loans. So, if you need your car to get to your place of employment or to find work, this monthly payment will likely take priority since if you default on your car payments, the lien-holder has the legal right to repossess your vehicle. In most states, once a creditor repossesses and sells your vehicle, they may obtain and pursue a deficiency judgment against you for the cost of repossession and the lost value in the vehicle.
Household Items – Secondary Importance For Repayment
Determine the secured property you can live without. For example, consider that $10,000 dining room set from Macy’s that you financed or that off-road vehicle you paid on credit and took to the dunes for weekend fun. These types of secured debts should go down to the bottom of your repayment list.
Depending on the age of the product and its price, there is a solid chance the creditor will not try to repossess the item. Generally, less expensive secured items like a computer or refrigerator typically have little resale value.
Therefore, creditors make a cost-benefit analysis and usually decide to refrain from repossessing the item because it’s simply too time-consuming and expensive to justify. It will not be because the seller liked your personality and wanted to give you a break.
The Bankruptcy Option
What happens if, after you have made a budget, figured out what you can cut, and explored ways to bring in more income, you are still under crushing debt that will prevent you from living at an acceptable level? Now that you are fully informed, this is the time to consider consulting with a bankruptcy attorney.
Consider the advice of at least two different bankruptcy attorneys before making your decision. A simple no-asset bankruptcy will likely cost $1,500 – $2,500.
Even before you meet with the bankruptcy attorney, you take the time to first learn about filing for bankruptcy and what this process entails. Specifically, understanding the types of plans available and what types of debts are dischargeable in bankruptcy.
While your attorney will be able to answer all of these types of questions, by understanding the process and the general rules of bankruptcy, you will ask better questions and feel more comfortable in the process.
