If you are struggling with debt and are behind on payments, it’s important to understand what kind of debt you have and how it will be handled should you miss too many payments. Dealing with debt can be scary and overwhelming, especially if you don’t know what will happen if you miss too many payments and default or have to file bankruptcy.
While bankruptcy itself can also be scary, it is often the best option if you have too much debt to get a handle on your financial situation. However, which type of bankruptcy you file will also depend on what kind of debt you have. Secured and unsecured debt is handled differently in Chapter 7 vs. Chapter 13.
Secured debts are a type of debt backed by an asset that is used as collateral. If you miss payments and default on this type of debt, the creditor can seize the asset to liquidate it and apply those proceeds to the money you owe. In some cases, the assets or secured interest is something a creditor voluntarily agrees to in a lien; in other cases, the lien may be involuntary.
For example, when you take out a home loan, you will be required to sign a mortgage which grants the lender a lien, or security interest against your home should you fall behind on payments. In other situations, you may not agree to a voluntary lien, but your property could still have a lien attached. Involuntary liens are imposed by state or federal law through the actions of a court. An example of this are judicial liens that can attach to real estate when a judgement is levied against you.
Common examples of secured debts include:
- Home loans
- Car loans
- Cash loans secured by other personal property
- Judicial Liens
- Tax Liens
When you fail to make payments on your secured debts and default, some creditors can immediately enforce their rights to seize your property without suing you. To enforce secured debts, your creditors may repossess your car or other vehicles, they may foreclose on your mortgage, or levy against other property you have either pledged as collateral or that is subject to an involuntary lien.
However, if you file for bankruptcy, it can put a pause on debt collection, including actions by secured creditors. How your debt is handled in bankruptcy will depend on which type you file. In a Chapter 7 you will be given a choice to either allow secured creditors to seize your collateral or continue to make payments until the debt is paid off. So in a Chapter 7 the collateral is surrendered or the contract is picked back up and a payment plan is entered into through a process called reaffirmation. In Chapter 13 cases, a repayment plan will be worked out based on your financial situation, which will allow you to pay back the secured debt over a 3-to-5-year period. A Chapter 13 can help catch up on defaulted payments and can modify repayment terms like interest rate and sometimes the principal balance on a secured loan can be reduced.
Unsecured debt, unlike secured debt, is not tied to any collateral or property. With unsecured debt, there is no lien or security interest agreed upon. Instead, when a debtor fails to pay, the lender must first file a lawsuit in order to collect what is owed. However, before a lawsuit is filed, lenders of unsecured debt will typically hire debt collectors in an attempt to recover what you owe. If an agreement cannot be reached between the debtor and the debt collector, the lender will likely file a lawsuit against you.
Common types of unsecured debts include:
- Credit cards
- Student loans
- Personal loans
- Medical debt
- Back rent
- Utility bills
- Child support
Once you start missing payments on unsecured debt, your lender will likely reach out to you to resolve the issue. If you continue to miss payments, the lender will typically report your account to credit reporting agencies and hire a debt collector to obtain what you owe. After you default, lenders must first take legal action and file a lawsuit against you before they can seize any of your assets.
Once the lender has obtained a court judgment against you, they can then proceed to use aggressive collection remedies to pay back what you owe. What collection remedies are allowed will vary by state. These remedies can include garnishing your wages and bank accounts and seizing and selling your non-exempt personal property. If the unsecured debt is a federal student loan, the Department of Education can garnish up to 15% of your disposable income without filing a lawsuit.
Again, you can decide to file bankruptcy instead, which can put a pause on collection efforts. If you file Chapter 7, most unsecured debts get discharged entirely. If you file Chapter 13, your unsecured debts will go into a repayment plan that allows you to make more affordable payments over 3 to 5 years. At the end of the repayment plan, if any unsecured debts are leftover, they may get discharged.
At Sawin & Shea, we believe in providing compassionate and understanding representation to those struggling with debt. If you have questions about your unsecured or secured debts and how bankruptcy can help, contact the attorneys at Sawin & Shea, LLC today. We can offer you guidance and support and walk you through the entire process to ensure the best possible outcome. We can even offer guidance after your bankruptcy case has ended.
Contact us at 317-759-1483 or send us an email for a free consultation today!