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The Important Difference between Secured and Unsecured Debt in Bankruptcy

Debt sign

If you’re finding that your debts are becoming harder and harder to manage on your own, you may be reading up on personal bankruptcy to see if it would be a good solution for you. If you aren’t particularly financially savvy, however, reading about the bankruptcy process can leave you feeling lost in a sea of unfamiliar terms and concepts. The differences between “secured” and “unsecured” debt may be some of these unfamiliar phrases, but they can have a major impact on your bankruptcy filing. Learn what makes these forms of debt different below, and speak with an experienced Maryland bankruptcy attorney about whether personal bankruptcy is the right choice for you.

What defines a secured debt?

Secured debts and unsecured debts are differentiated based on whether or not the creditor has a lien against a piece of property or other item you own. A “lien” is a legal interest or charge against property in your possession. A creditor’s debt is “secured” when they have the legal right to repossess property against which they have a lien if you fail to pay that debt. For example, if you buy a car on credit, the creditor has a lien on the title of your car. If you don’t make your car payments on time, the creditor can repossess the vehicle. Other forms of secured debt include home mortgages and judgment liens. In contrast, debt which is “unsecured” is not tied to any property you own, and without taking additional steps, the creditor has no legal right to take your property if you fail to pay your debts on time. There are ways that unsecured debts can become secured, which we will explain in a future post.

Bankruptcies filed under Chapter 7 will, generally speaking, eliminate the debts you owe to your creditors. There are a number of exceptions to this rule, including certain tax debts and student loans. Your unsecured creditors may receive a sum of money as a settlement of the amount you owe, but after the bankruptcy is closed, that creditor has no further claim against you. Secured debts are treated differently. While a bankruptcy can eliminate the amount you owe the creditor on that debt, it cannot eliminate the lien that a creditor holds on your property. For example, if your purchased an expensive TV on credit, a Chapter 7 bankruptcy will result in you no longer owing the creditor money for that TV, but it can also result in the creditor repossessing the TV. Skilled bankruptcy attorneys will be able to advise you on strategies for holding onto property in a Chapter 7 bankruptcy, such as through lien avoidance or loan reinstatement. Talk to an attorney as soon as possible to avoid legal actions against you by your creditors.

For help with unmanageable credit card or medical debt, speak with an experienced and compassionate Maryland bankruptcy attorney about your options, and whether filing for bankruptcy is the right solution for you, by contacting the Germantown bankruptcy and consumer law firm Haeger Law for a consultation, at 888-463-3520.