Whether bankruptcy is right for you doesn’t just depend on how much you owe—it also depends on what kind of debt you owe.
The two general categories of debt are secured and unsecured. Secured means that the debt is attached to some type of collateral, such as the vehicle or home in an automobile loan or mortgage. Secured debt also includes property to which creditors or lenders have attached a lien—this is common when you owe tax debt. If you don’t make payments on secured debt, your lender or creditor can take the collateral without taking you to court first.
Unsecured debt, meanwhile, is any type of debt that is not attached to collateral, such as:
- Medical bills
- Credit card debt
- Payday loans
- Utility bills
The only way an unsecured creditor can force you to pay is if they sue you and obtain a judgment against you.
If you’re considering bankruptcy, this distinction is important because the bankruptcy court can typically only discharge unsecured debt. As such, you must be caught up on arrears for your mortgage and other secured debt by the end of your bankruptcy case. The bankruptcy will trigger the automatic stay, which will keep you safe from foreclosure or repossession while the case is open, but your lender can still take your property once the proceeding concludes if you aren’t caught up on payments. The bankruptcy can technically discharge your obligation to repay the debt, however, which means your lender will not be able to sue you for the deficiency if they sell it for less than it’s worth.
While secured debt is not technically dischargeable, you may benefit from a cramdown if you file Chapter 13. This is where the bankruptcy court crams down (i.e. reduces) your principal to the fair market value of the property. Let’s say, for example, you owe $300,000 on a home that is only worth $250,000. The court could cramdown your secured amount to $250,000, converting the $50,000 difference to unsecured debt. This unsecured debt could then be discharged once you complete your 3-5-year repayment plan. However, you cannot cramdown a mortgage on your primary residence. There are very specific rules when attempting to cramdown a secured debt in a Chapter 13. The rules differ depending on the type of secured debt you are attempting to cramdown. It is important to discuss your options with an experienced attorney.
Be aware, however, that not all unsecured debt is dischargeable. While debt like criminal fines, child support, and alimony are not secured by collateral, the bankruptcy court will not eliminate your liability for these amounts.
Ultimately, the way bankruptcy affects your financial situation will depend on a number of factors, and only an experienced attorney can give you a dependable prediction regarding life after your case.
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Our attorneys at The Buchalter Law Group have more than 45 years of combined bankruptcy experience. We have helped countless individuals navigate this legal terrain and come out the other side with substantially improved financial circumstances. With our support and guidance, you can make fully informed decisions and begin your path toward freedom from endless debt.