If you are considering filing for bankruptcy, understanding the difference between secured and unsecured debt is crucial. These two types of debt are treated differently when it comes to bankruptcy law, which can be complex and overwhelming. How your debts are classified can have a significant impact on the outcome of your case, like what you have to repay and what assets you may retain or lose. For more information and to secure skilled legal representation, continue reading and speak with a knowledgeable Bergen County bankruptcy lawyer today.
What is Secured Debt?
Secured debt is debt that is backed by collateral, meaning something of value that the lender can potentially take if you fail to pay back your loan or debt. For example, auto loans are secured by your vehicle, and a mortgage is secured by your home. If you fail to make payments on your auto loan, the bank that lent you the money has the authority to repossess your car. The same goes for your house if you do not make mortgage payments.
What is Unsecured Debt?
Unsecured debt is not backed by anything or tied to a specific asset. The lender gives you money or credit without securing collateral, meaning that it is a bigger risk to them. Common examples of unsecured debt include credit cards, student loans, medical bills, personal loans, and more.
With these types of debts, there is no property for the lender to place a lien on if you don’t pay. Instead, they can attempt to take legal action against you to collect payments.
What’s the Difference Between Secured and Unsecured Debt in Bankruptcy?
As established, the biggest difference between secured and unsecured debt is that secured debt comes with collateral and is less risky for the lender, as they will be able to get the asset back if you do not make payments. Additionally, secured debts often have a lower interest rate than unsecured debts. Because it is riskier for the lender to hand out money without collateral, unsecured loans often have higher interest rates to encourage payments.
These debts are also treated differently during bankruptcy. Unsecured debts are often discharged during bankruptcy, especially Chapter 7, meaning that you will no longer be required to pay them. It should be noted that this does not apply to all debts. Student loans, for example, can be extremely difficult to discharge.
Secured debts can be discharged, but most people want to retain ownership of the asset, like a home or vehicle. In this case, the lender’s lien on the collateral asset remains, and you must continue making payments or attempt to reaffirm or redeem the property. Otherwise, you must surrender the collateral.
Bankruptcy law can be complex, so it is imperative that you work with a skilled attorney. Contact the Law Office of Boyd & Squitieri to set up your free consultation today.