Bankruptcy Debts: Secured vs. Non-Secured 

When an individual files for bankruptcy, the court will typically grant a discharge releasing him/her from their legal obligation to repay certain debts.  It’s important to realize which debts can and cannot be discharged in a bankruptcy proceeding.  Secured debts, which are those that involve some type of collateral being given in exchange for a loan, such as a home mortgage, auto loan or secured personal loan, are not discharged in the same way as an unsecured debt, such as credit cards. 

During a bankruptcy proceeding, the debtor may receive a discharge from both secured and non-secured debts.  However, the lender holding security interest in a secured debt will have the right to repossess or foreclose on the property if it is not paid for according to the terms of the original agreement.  Typically, a debtor has two choices when it comes to discharging a secured debt.  He/she can continue to pay the debt as agreed and retain ownership of the property or it must be relinquished to the lender with no further obligation.  If the debtor decides to continue paying the secured debt, the lender may request that a reaffirmation agreement be signed.  Not every state requires that this document be signed in order for the debtor to retain the property as long as the debt is current and continues to be paid.   

If a reaffirmation agreement is signed, it must be approved by the court and it will reaffirm the debt in writing as though the bankruptcy never occurred.  This means that the original terms of the agreement will remain in effect and should the debtor later default, the lender may use collection and/or other legal attempts to recover payment.  If a reaffirmation agreement is signed for an auto loan, for instance, and the debtor later falls behind and the automobile is repossessed, the lender may pursue a deficiency judgement if they are unable to sale the vehicle for the remaining balance due on the loan.   

An unsecured debt is a loan that was granted without collateral, such as a credit card and/or some personal loans.  With that being said, it’s important to note that some charge accounts, which appear to be a regular credit card, may be considered as secured debts.  An example may be an electronics store or computer manufacturer that grants a charge account for purchases made exclusively with the company.  In this case, the lender may hold a security interest in any property purchased, which makes the debt secured.  Major credit cards are typically not secured and are listed as revolving credit accounts.   

In conclusion, bankruptcy filers must look at their individual debts in order to determine the appropriate chapter under which to file.  Debts that include child support, alimony, most taxes, debts incurred by fraud, student loans, court-ordered restitutions or judgements resulting from either negligent or intentional harm to a person or property cannot be discharged in a Chapter 7 bankruptcy.  If a debtor needs to reorganize his/her personal consumer debts, a Chapter 13 bankruptcy may be recommended. 

The information contained in this article is designed to be used for reference purposes only.  It should not be use as, in place of or in conjunction with professional legal or financial advice.  For additional information relating to the filing of bankruptcy, consult a local attorney who specializes in bankruptcy law.