If you’re considering filing for bankruptcy it is essential to know the difference between secured debt and unsecured debt. The most basic difference is that secured debt can be taken away from the debtor and unsecured cannot. Secured debt involves a tangible property which helps safeguard the creditor, since they can repossess the property in the event of non-payment. Unsecured debt is the direct opposite and will include your credit card bills, medical bills, rent and utilities-to name a few. Banks will typically offer a lower interest rate on secured debt, since there is collateral involved keeping their investment safe.
There are a couple exceptions to this rule; a nonconsensual lien on your property is considered a secured loan. When you owe the IRS taxes or you had a home improvement that wasn’t paid in full the creditors can legally place a lien on your home. This is secure debt because you won’t be able to sell your house with a lien on it, which helps protect the creditor.
Another exception to the rule is student loan debt. You would think it falls under unsecured debt, since your education can never be taken away from you. In most cases student loans are secured by the government, and you will be required to pay them back. For this reason, you should continue making payments on school loans before any other unsecured debt.
One last secured debt is a secured credit card. These are not as common and can usually help you build your credit after filing for bankruptcy. These credit cards are essentially pre-paid, since you will need to have the cash before they approve your credit line. In this case the lender is protected, which turns it into secured debt.
A general rule of Chapter 7 bankruptcy is that you must continue making payments on the secured debt you want to keep. Always pay off your secured debt first. Chapter 13 bankruptcy cuts a little break for secured debt. In your repayment of your secured debt the debtor must repay the “value” of the collateral and interest. The remaining balance becomes unsecured and the debtor usually can pay back unsecured debt for pennies on the dollar. In any event, if you feel overwhelmed by your debt and are considering a bankruptcy, contact a Rio Grande Valley bankruptcy lawyer as soon as possible to learn about your bankruptcy and to protect as many assets as possible.
Jeff Davis is the Owner of the Davis law firm, and a highly experienced Harlingen, McAllen, and Edinburg bankruptcy attorney. To find out more information about a Rio Grande Valley bankruptcy lawyer, please visit www.jeffdavislawfirm.com.