Secured Debt vs Unsecured Debt
New Jersey Bankruptcy Attorney Explains Different Kinds of Loans
Filing for bankruptcy is one way you can get out from under unmanageable debts and get a fresh financial start. However, there are different types of debts, and you may not always be able to discharge them all in bankruptcy. In general, bankruptcy is most helpful in eliminating unsecured loans like credit cards and medical debt. Secured debts, on the other hand, may be more difficult to discharge, although bankruptcy can help you manage these types of loans as well.
Many people have only a vague idea about what types of debt they owe until they need to file for bankruptcy. A New Jersey bankruptcy attorney from Garland & Mason, L.L.C. can examine your financial situation and explain your options in a free initial consultation. We have been providing debt relief options to clients throughout Manalapan Township and Monmouth County for more than 25 years. If you have questions about secured and unsecured debts, we have answers.
The Difference Between Secured and Unsecured Debt
Your options for debt relief often depend on what kinds of debts you owe, as well as how much you owe and how much you make. The discharge of unsecured debts is often more straightforward than removing secured debts. However, bankruptcy, debt consolidation and/or loan modifications can usually help in either case. The difference between these kinds of debt is:
- Secured Debt. These debts are connected to specific property that you own. The property acts as collateral or security that guarantees you will pay the loan. If you do not pay off what you owe, your creditor can reclaim the property. For example, mortgages are secured loans. In a mortgage, your house is the collateral for the loan you get from the bank. If you do not keep up with your house payments, the bank may eventually repossess your home. Secured debts may also include car loans and any property you buy on an installment agreement plan.
- Unsecured Debt. This kind of debt is not secured by any property or collateral. If you do not pay these debts, your creditor may file a lawsuit against you, but they cannot take any property. The most common example of unsecured debt is most credit card debt. Unsecured debts also include medical bills and utility payments. Student loans are a special exception. These loans are technically unsecured, but they are not treated like other unsecured debts in bankruptcy.
In bankruptcy, you can usually discharge your unsecured debt after paying off a portion of what you owe. However, you cannot discharge secured debts unless you surrender the property in question back to the creditor. If you want to keep the property, like your house or car, you must settle your overdue payments by the end of the bankruptcy process.
Are Property Liens and Priority Claims Secured Debts?
Unsecured loans are inherently more of a risk for creditors, since they may not recover any money if you file bankruptcy. However, if you fall behind on payments of your unsecured debts, your creditors may file a lawsuit to get a money judgement or property lien against you. A lien is a legal claim on something you own, such as your house.
Liens are secured debts, so even if you file bankruptcy, you cannot discharge them without surrendering property. In essence, a judgement or lien allows your creditors to convert your unsecured loan into secured debt. Therefore, it is usually in your best interest to file Chapter 7 bankruptcy or Chapter 13 bankruptcy before your creditor obtains a lien.
Priority claims are unsecured debts. Common priority claims include tax debt, child support, alimony payments and student loans. However, special rules apply to them during the bankruptcy process. In bankruptcy, you pay off priority claims first and they are nondischargeable. Since they are not secured by property, you generally cannot eliminate priority claims except by paying them off. Although bankruptcy can help you manage these debts and return your payments to current status, you will still owe any outstanding balance on priority claims after bankruptcy.
Questions on Dischargeable Debts? Call a New Jersey Bankruptcy Attorney Today
Filing for bankruptcy may seem intimidating, especially if you owe many different types of debt. However, a qualified, experienced New Jersey bankruptcy attorney from our firm will answer your questions, consider your situation and explain your options, free of charge. Contact us online or call our law office in Manalapan today to get more information about debt relief.