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How Do Secured and Unsecured Debt Relate to Bankruptcy?

Bankruptcies treat secured and unsecured debt differently and, when working with a bankruptcy lawyer, a basic understanding of what each is and how they relate to bankruptcy is helpful.

With secured debt, you own collateral that backs the debt, such as a house, car, or appliance and you make regular payments to the creditor.  Unsecured debt, on the other hand, has no collateral to back the debt.  Examples include credit card debt, medical bills, utility bills, and unsecured loans.

What you should know about secured debt

By working with a bankruptcy lawyer to hang onto secured property in a Chapter 7 or Chapter 13 bankruptcy, you may be able to work out a payment agreement that reduces the amount of debt owed and enables you to keep the secured property.  While Chapter 7 eliminates personal liability on debt, it does not automatically eliminate liens against property.  Therefore, even after bankruptcy certain assets may still be subject to a lien.  This means that after your bankruptcy is complete, creditors can still repossess the property unless you work out mutually agreeable payment arrangements.  In some cases, creditors file motions for relief from the automatic stay and the courts allow them to repossess property while the bankruptcy is ongoing.

It is important for you to discuss discharge and liens with your bankruptcy lawyer and to understand how your bankruptcy filing affects your secured and unsecured debts.

Debt limitations on filing bankruptcy

Your amount of secured and unsecured debt can also affect your eligibility to file for Chapter 13.  According to the U.S. Courts, (http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter13.aspx) under 11 USC § 109, debtors who exceed certain debt limitations are not eligible for Chapter 13.  Currently, the limits (these are changed periodically) are:

  • Secured debt cannot be greater than $1,081,400
  • Unsecured debt cannot be greater than $360,475

Some types of debt take priority over others

The law divides unsecured creditors into categories and labels some creditors as priority creditors and other as general creditors.  When the estate's assets are not enough to pay all unsecured debt, the unsecured priority creditors receive payment first.  In many bankruptcies, general unsecured creditors end up receiving no payment at all.

Working with a skilled and experienced bankruptcy lawyer can help you make informed decisions that protect assets and resolve insolvency.

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