Types Of Debt

Unsecured Debt

Unsecured debt includes any debt not linked to an asset. Money freely lent to you based only on your promise to repay it is unsecured. Types of debts that typically fall under the unsecured category are credit cards not secured by property (most credit cards are unsecured), medical bills, repossession deficiencies, foreclosure deficiencies, signature loans, and any other type of standard consumer credit line.

Although most retail store cards are unsecured, just because you have a plastic card from the store doesn’t automatically make the debt unsecured. One thing to keep in mind, the contract with your creditor determines whether the debt is secured or unsecured. Sometimes a debt that appears to be unsecured may actually be linked to some property if the consumer has more than one loan with the same bank through a concept called "cross-collateralization." For example you may have a home mortgage with Comerica Bank that is clearly a secured debt with your home as the collateral. When Comerica Bank later sends you a credit card application and you take them up on their offer, you may be in a cross-collateralization situation because the new credit card may be tied to the mortgage you already have with the bank.

Secured Debt

Secured debts are linked to specific items of property. The property guarantees payment of the debts because if the debt is not paid, the creditor can take the property or force the sale of the property to pay off the debt. Most secured debt you incur voluntarily such as a mortgage or car loan. Others are imposed on you by creditors such as judgement liens or tax liens.

Secured Debt and Bankruptcy – The effect of filing bankruptcy on secured debt is fairly technical. Bankruptcy can eliminate any personal liability stemming from the secured debt. That is to say, if you choose to give back the property, the deficiency left under the original contract becomes unsecured debt and you may discharge that amount on the same basis as other unsecured debts.

In bankruptcy, the consumer has many options for dealing with secured debt. Those options include:

  1. surrender the property;
  2. attempt to avoid the lien;
  3. redeem the property at fair market value;
  4. reaffirm the debt by waiving your discharge as to that debt;
  5. put the lien into a chapter 13 plan.

There are advantages and disadvantages for each one of these options; no single option is best or worst. It is always best to discuss your options with an attorney before making a decision on secured debt.

Non-Dischargeable or Priority Debt

Not all debt can be discharged in either chapter 7 or chapter 13. Some debts survive the process and are valid and collectable after bankruptcy. The intricacies of dischargeability are beyond the scope of this report, however, some generalizations can be made to give you an idea of what to expect. Debts that usually are not dischargeable include student loans, local, state and federal taxes, domestic support obligations, such as child support and alimony, court fees and fines, and debts resulting from drunk driving.

Debts not listed on your bankruptcy petition are also not discharged. Creditors must receive notice of the bankruptcy to be bound by it. Keep in mind the circumstances of your individual case will dictate how the law applies to you.