Bankruptcy and Unsecured Debt

Unsecured Debts

Debts that are unsecured (e.g. credit cards, medical bills, etc.) are those which are not secured (secured means if you do not pay, the can repo or foreclose, e.g cars, house, etc.) anything you own. The creditor does not have a right to repossess anything if you don’t pay the debt. In general, it’s easier to deal with unsecured debt than secured ones in bankruptcy.

Unsecured Debts Turning into Secured Ones

Unsecured debts can turn into secured ones if you don’t pay them. A credit card holder or medical provider can sue you for the balance owed, get a judgment against you, and usually can record that judgment as a lien against your home and other possessions. If you don’t pay your federal income taxes, the IRS can record a tax lien against your real estate and personal property without suing you.

Under some circumstances, bankruptcy can turn an unsecured debt that had been turned into a secured one by the creditor back into an unsecured one. But not always. For example, an older income tax debt that could have been completely “discharged”—written off without paying anything—may have to be paid in full once a tax lien was recorded on it. So, in general it’s better to file a bankruptcy case before creditors can turn unsecured debts into secured ones.

Secured Debts Turning into Unsecured Ones

When a secured creditor repossesses or forecloses on something you own and sells it and credits the sale proceeds against your balance, any remaining debt is now unsecured. Many times, when a creditor asks you to voluntarily surrender your car, they do not tell you that they will sell it at auction and come after you for any remaining amount due. It is not uncommon for someone to voluntarily surrender a car and then get a bill for $5,000 to $15,000 after it is sold.

“Priority” versus “General Unsecured” Debts

There are two broad kinds of unsecured debts.
Priority debts are those that the law treats as special because of different policy reasons for treating that particular kind of debt more favorably. For example, unpaid child support and income taxes are priority debts. Congress has determined that bankruptcy should not be able to discharge child support or hinder its collection because of the high value Congress places on the payment of child support. And income taxes are considered a social obligation that we should not be able to avoid easily. And yet income taxes can be discharged if they are old enough and meet some other conditions.

General unsecured debts are simply unsecured debts that do not fit into any of the “priority” debt categories. General unsecured debts include most unsecured ones, such as medical and credit card debts, retail accounts, personal loans, many payday and internet loans, unpaid utilities and other bills, claims against you arising out of vehicle accidents other injuries, and out of contractual and business disputes, overdrawn checking accounts, bounced checks, the remaining debt after a vehicle repossession or real estate foreclosure, many kinds of debts from operating a business, and on and on.

Chapter 7 vs. Chapter 13

If most of your debts are classified as general unsecured debts, and are not “priority” ones, you’d lean towards filing a Chapter 7 bankruptcy case. That’s because it usually discharges (writes off) those debts quickly – let’s say 3 or 4 months – and almost always without you needing to pay anything on those debts.
In contrast, in a Chapter 13 case you would usually have to pay some portion of your “general unsecured” debts (although in some situations you may not pay anything). Also, the discharge of the remaining unpaid portion would not happen until the end of the 3-to-5-year payment plan.

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wh Law, is a debt relief agency. We help people file for bankruptcy protection under the U.S Bankruptcy Code.