Any time you borrow money, whether it’s from an individual or a financial institution, you’re borrowing money from either a secured or unsecured creditor. Naturally, the sum you owe to that creditor will also be secured or unsecured debt. Why does that matter? Because if you ever find yourself considering bankruptcy, unsecured debt is handled differently than any debt you owe to secured creditors.
Read on to learn what you need to know about the differences between secured and unsecured creditors. As always, if you have any questions, get in touch with my office, and I’m more than happy to help.
What Is an Unsecured Creditor?
An unsecured creditor is a lending institution or person who allows you to borrow money without first obtaining collateral to secure the loan. In the event you default on the loan, the creditor will have nothing to fall back on given the lack of collateral.
Because unsecured lending presents a significant risk to creditors, getting a full-blown loan without collateral is pretty uncommon. However, racking up unsecured debt is not. In fact, most people have multiple types of unsecured debt, which may include:
● Medical bills
● Student loans
● Unpaid income taxes
● Balances on major credit cards
● Balances on department store credit cards
● Personal loans that didn’t require a security agreement
As you can see, unsecured creditors can range from hospitals and doctor’s offices to credit card companies and student loan issuers. Generally speaking, most of the debts you’ll incur throughout your life will be unsecured. If you fail to pay as agreed, the creditor’s only real recourse is to bring the matter to court to settle the debt.
Should you ever need to file for Chapter 7 or Chapter 13 bankruptcy, the type of debt you have is important because it helps determine what happens during your bankruptcy case.
What Is a Secured Creditor?
A secured creditor is any entity that issues credit or a loan that’s backed by collateral from the borrower. If you apply for a secured credit card, you must furnish a deposit, which acts as collateral. If you apply for a secured loan, you must pledge personal assets — vehicles, property, jewelry, investments, art, etc. — as collateral. The type of collateral a secured creditor will accept depends on the borrower (you).
Generally, secured creditors are financial institutions, but they can also be other entities like personal creditors or even businesses that are not in the financial sector. Typically, secured credit contracts include an agreement that allows the creditor or lender to place a lien on any property or assets you pledge as collateral. In the event you default on your payment agreement, the creditor has a right to obtain court approval to seize your collateral.
What Happens to Unsecured & Secured Debt in Bankruptcy?
If you find yourself seriously considering Chapter 7 or Chapter 13 bankruptcy because you’re struggling to repay your debts, you’ll need to separate those debts into secured and unsecured categories. The type of debt you have will help determine whether it’ll be wiped out (discharged) when the court discharges your bankruptcy case.
The type of bankruptcy you file for will also help determine what happens to your secured and unsecured debt. Here’s what you should know:
● Chapter 7 bankruptcy. When you file for Chapter 7, most of your unsecured debts will be wiped out when your bankruptcy case is discharged. As long as you remain current on your secured debt payments such as a home or car, you will be able to keep the home or the car. Most people don’t lose property in Chapter 7 bankruptcy cases because they don’t own anything that qualifies as non-exempt.
● Chapter 13 bankruptcy. When you file for Chapter 13, you’ll be put on a three- to five-year repayment plan that gives you the opportunity to repay either a portion or all of your debt. When you file, the court will issue an automatic stay, which prevents your secured creditors from taking any further collection action against you as long as you remain current on payments.
Considering Bankruptcy? Schedule a Free Consultation With a Minneapolis Bankruptcy Attorney
If you’re feeling overwhelmed by your debts, get in touch with the office of Ron Lundquist, Attorney at Law to schedule a free bankruptcy consultation today. Filing for bankruptcy with the help of a knowledgeable attorney can give you the opportunity to start fresh and rehabilitate your finances. To get started, call us today at 651-454-0007, or request a consultation here, and we’ll be in touch.