Secured v. Unsecured Debts

As a Maryland bankruptcy attorney I have found that many of my clients have misconceptions about which types of debts can be discharged in bankruptcy. I feel every consumer should be educated about which types of debts can be discharged before deciding to file for bankruptcy.

Secured vs. Unsecured Debts

I have found that a large portion of people do not know the difference between a secured debt and unsecured debt. Secured debts are those that have assets put up as collateral against the loan. Defaulting on secured debt leaves the asset legally available for seizure and liquidation by the creditor in efforts to satisfy the debt owed. The most common types of secured debts are mortgages and car loans. Some personal debts are secured debts if a person has agreed to use an asset as collateral for the loan agreement.

Unsecured debts are those that do not have any assets secured as collateral. If a person defaults on an unsecured debt, the creditor has no legal claim over the asset for debt repayment. Common unsecured debts are credit cards, medical bills and utility bills. Most personal loans are unsecured debts as they do not have any agreement specifying an asset as collateral.

Filing for bankruptcy can eliminate nearly all of a person’s unsecured debts. Since there is no asset used as collateral in an unsecured debt, creditors have fewer options for debt repayment and are unable to liquidate an asset to satisfy the debt. Unsecured debts are resolved in bankruptcy through a debt write-off, as in Chapter 7, or through a Chapter 13 debt repayment plan.

Special Cases For Unsecured Debts

There are a few exceptions of unsecured debts that cannot be discharged through bankruptcy. The most commonly asked about is domestic or spousal support payments. Bankruptcy laws do not allow for child support or alimony support payment debts to be eliminated through bankruptcy. In some circumstances the court may grant these debts to become part of a Chapter 13 repayment plan, but these debts will never qualify for Chapter 7 assistance.

Student loan and tax debts are also frequently brought up in regards to discharge. Legally, federal student loans and unpaid taxes are not allowed to be discharged through bankruptcy. Because these debts are owed to federal entities, these debts must be repaid. However, there are some circumstance s in which a hardship may be granted and repayment assistance can be obtained through the federal agency itself.

The Maryland Bankruptcy Center attorneys help hundreds of Maryland file bankruptcy each year. If you would like a free consultation, call 1-800-NEW-START today and we will answer all of your questions and give you the fresh start that you need.

David L. Ruben, Esquire