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What is the difference between a secured and unsecured debt?

On Behalf of | Jan 25, 2022 | Bankruptcy | 0 comments

Personal debt has a way of snowballing even when people think they have control over their finances. Eventually, the climbing balance on their credit cards or an unexpected hospital bill will stretch their budget too thin, leaving them unable to make all of their monthly minimum payments.

If you have more debt than you can currently manage, you may need debt relief of some sort, possibly even bankruptcy to reduce your debts. There are different options available for those with debt problems depending on the amount of debt they have and their current financial circumstances.

Typically, if you file for bankruptcy, your discharge will apply to your unsecured debts but not always to your secured ones. What is the difference between unsecured and secured debt?

Secured debt has collateral property or a deposit attached

A secured debt is a debt with some sort of collateral property set aside by the borrower. A mortgage is a secured debt, with the house serving as the collateral property. People can also obtain secured credit cards by making a deposit with a credit card company.

Unsecured debts have no collateral property. They are therefore much easier to include in the discharge of a bankruptcy and do not require reaffirmation or negotiation. While you may not be able to just discharge your secured debts without giving up the collateral property, a bankruptcy filing may make it easier for you to negotiate a loan modification to help you regain control over those accounts.

Why the kind of debt matters in bankruptcy

If you might qualify for Chapter 7 bankruptcy, it can be a good option when you have a lot of unsecured as a Chapter 7 bankruptcy makes it easier for you to quickly discharge the balances owed on credit cards and medical debts that you have no way to repay.

On the other hand, if you have a massive mortgage or other secured debts, a Chapter 13 filing could be the better option. Chapter 13 bankruptcy makes it easier for you to renegotiate some of your debts with your creditors while retaining the collateral property.

Learning more about the different kinds of debt can help you decide on the solution for your debts that will work for your family, including personal bankruptcy.