Before you file bankruptcy, it is important to have a general understanding of how it will treat your debt.
You may have already heard that bankruptcy can help relieve you of your burdensome debts, but are less clear about exactly how it would affect your debts specifically. The answer to the question depends on the type of debts that you owe and the type of bankruptcy that you file.
Generally, consumers have two types of debt-secured and unsecured. Secured debt is debt where repayment is secured by the pledging of collateral. If this type of debt becomes delinquent, your creditor may take back the collateral. Common types of secured debt include mortgages and car loans.
Conversely, unsecured debt is not secured by collateral. If you default on this type of debt, there is no threat of repossession. Instead, the debtor may file a lawsuit against you or hire a collection agency to collect the debt. Examples of this type of debt are credit cards, medical bills and utilities.
Bankruptcy‘s affect on each type
The manner in which bankruptcy affects each debt type is dependent on the type of bankruptcy filed. Chapter 7 eliminates virtually all unsecured debt in as little as three months after filing. However, secured debt is treated differently. Chapter 7 can eliminate your personal obligation to repay the secured debt, but it does not affect your creditor’s right to repossess the collateral. In order to keep the collateral, it is necessary to stay current on the payments during the Chapter 7 process. Fortunately, this is easier than it was before bankruptcy, as your unsecured debt is eliminated, allowing you to devote more of your income towards your secured debts.
If you file Chapter 13, all of your debts are consolidated into a payment plan. Under the plan, you make monthly payments towards your debts over a three to five-year period. Although it may seem that you must repay all of your debts in full, this is not the case. Under the plan, unsecured creditors are only entitled to receive as much as they would have received if you filed Chapter 7 instead. Since this is nothing in the majority of cases, most unsecured debt is wiped out at the end of the Chapter 13 process.
For secured debt, Chapter 13 does not wipe away the debt, but gives you three to five years to make it current. As long as the agreed payments towards your arrearages are made under the plan, your creditor is prohibited from taking the collateral pledged. Because of this, Chapter 13 is an excellent choice for those far behind on their secured debt that would like to hold on to their houses, cars or other collateral.
There are many exceptions to these general rules. For example, some types of debt, such as child support, alimony and taxes that cannot be eliminated in bankruptcy. It is therefore important to speak to an experienced bankruptcy attorney before you file. The experienced bankruptcy attorneys at Nickless, Phillips and O’Connor can listen to your debt situation and counsel you further on how bankruptcy would affect you specifically.
-On behalf of David Nickless