What Happens To Debts In Bankruptcy
If you are considering bankruptcy, you probably know the basics: much of your debt will be discharged and you may have to give up some property.
Many people have a home, a car, credit card debt, and perhaps miscellaneous other debts. Most debts either categorized as “secured” or “unsecured” and they are treated differently in bankruptcy.
A secured debt refers to debts that were for a tangible item, like a home or a car, which secures the loan from the financial instutition.The item is called “collateral,” and if you fail to maintain your payments to the lender, the security interest in that collateral authorizes them to seize or repossess that item.
In bankruptcy, you may decide to keep or surrender these items. If you have significant debts and plan on declaring bankruptcy, but are current on your car payments, you could decide to keep the car and continue making payments. On the other hand, if you cannot afford the vehicle, you will need to surrender it.
Unsecured debts, by contrast, are not linked to any real estate or personal property. Most credit card debt for example is unsecured and sometimes call ‘non recourse’ debt, because If you fail to pay on this debt, the lender has no recourse to seize any property.
Remember, credit card companies are not ‘generous.’ They make up for their losses by charging much higher interest rates than a secured lender could charge. They balance the risk of loss by making all customers who carry a balance pay a higher interest rate.
In most bankruptcy proceedings, unsecured debt is discharged and the lender is prohibited from attempting to collect after the bankruptcy court issues the official discharge at the end of the bankruptcy case.
Most homes are purchased with a mortgage. The home is the collateral for the promissory note and the mortgage ties (secures) the property to the promissory note. If you are behind on your home payment and in default, your lender can begin the foreclosure process.
For many homeowners, in recent years, an added risk with a foreclosure is that once the lender has reclaimed and sold the home, the proceeds from the sale may be insufficient to pay the remaining balance on the loan. When this happens, the lender can then sue you to collect on the ‘deficiency’ balance, even if you no longer live in the home. A bankruptcy can eliminate this threat.
Home Equity Loans?
Home equity loans are also secured debts. In recent years, some homeowners used home equity loans (when their home had equity) to pay credit card bills, buy cars or other expensive items.
They then found that they were ‘underwater’ with their first and second mortgages. In that situation, a Chapter 13 bankruptcy may be used to strip the home equity loan from the home and be treated as an unsecured debt. Our attorney can help you determine if that may work for you.
Contact us to discuss your situation and your debts. We will answer your questions, explain your Chapter 7 liquidation or Chapter 13 options and handle your bankruptcy filing for bankruptcy serves you best.
We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.