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    Chapter 7 Bankruptcy

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    What is Secured Debt?

    If you have been struggling with debt or investigating your options with regard to bankruptcy, you may have come across the term “secured debt.” Most of your high-value debt will be secured debt, and this is also debt that is difficult to clear in bankruptcy without relinquishing the property that is attached to the loan.

    But what is secured debt exactly? It is debt that is guaranteed by its attachment to some other property — such as a mortgage on a house, a loan on your car, etc. Secured and unsecured debt have a number of differences, including their interest rates, the difficulty of discharge in bankruptcy, and what they are typically used for by consumers.

    Your Most Valuable Debt is Probably Secured Debt

    When you buy a home, the mortgage that you sign and pay every month is backed by the house itself. If you fail to pay your mortgage, eventually the bank will foreclose on your property in order to pay off the debt that you owe. This is a perfect example of secured debt — the mortgage loan is secured by the actual house.

    The other very common example of secured debt is a car loan. When you purchase a car, just like when you purchase a house, you typically guarantee that loan by giving the lender a right to repossess the car if you do not make your payments on time. Again, the car secures the loan.

    A third example of a secured debt that is a little bit different than a car note or traditional mortgage is a home equity line of credit (HELOC). With a HELOC, you are typically not using it to purchase the home (unlike a traditional mortgage) but you are still borrowing against the house for some other reason. Many people use this as a  low-interest method of consolidating credit card debt or other consumer debt. Other people will take out a HELOC in order to renovate their houses. And if they default on this loan, again, the lender can foreclose upon the house and sell it in order to pay off the outstanding HELOC loan.

    Because secured debt is protected by some collateral, it typically has a lower interest rate than unsecured debt. This is why taking out a HELOC to consolidate credit card debt may be an effective strategy for some people to lower their interest rate and pay down their debt more quickly.

    But Most Types of Debts Are Unsecured Debt

    Most people who file bankruptcy have fallen behind on numerous types of debt — late bills, unexpected medical bills, past-due credit cards, etc. Most of these types of consumer debt are unsecured debt. They are unsecured because the lender cannot repossess whatever was purchased with the borrowed funds – no matter how hard they try, the hospital can’t repossess your transplanted kidney, and American Express can’t show up and repossess your new PlayStation 5. Instead, these lenders have to head to court first, get a judgment against you that states how much you owe, and then try to garnish your wages or put liens on property in order to get paid back. This debt is obviously much more risky for them, and as a result, they usually charge higher interest rates.

    What About Secured Credit Cards?

    If you have been dealing with debt for a while, or have a low credit score, you have probably heard about secured credit cards. While most credit cards are unsecured debt, meaning a creditor has to jump through lots of legal hoops to get paid if you default on the loan, secured credit cards are a little bit different. With a secured credit card, you typically put down a deposit and then the lender allows you to use your credit card for the amount of that deposit. It sounds silly, because you are lending the bank a couple hundred bucks so that they lend you a couple hundred bucks. But, once you have demonstrated that you can use that credit card line responsibly and make your payments regularly, most card issuers will eventually offer to move you to a typical unsecured credit card with a higher limit.

    How Does Secured Debt Work in a Bankruptcy?

    For most people, their bankruptcy is a Chapter 7 filing, where their debt is eliminated after some property is sold and the case is closed. However, does that mean people simply get to keep their cars and houses and now owe nothing on them? After all, there are exemptions for houses and cars in most states when a debtor files for bankruptcy.

    It’s not that easy. If it was, everyone would take out a massive mortgage and buy a new car, then file for bankruptcy.

    Your Chapter 7 bankruptcy filing will allow you to escape that secured loan. If you want to walk away from the property itself, you can surrender the secured property to the lender and you walk away without any debt owed on that property. However, if you want to keep the property, you will have to make a plan to stay current with your monthly payments as if there was no bankruptcy at all. If you choose this option, you will have to let your lawyer, the court, and the lender know of your intent to keep the property and you’ll need to stay up-to-date on your payments.

    Compare that to unsecured debt, where the debt is basically wiped out right after any proceeds from selling off your assets are distributed. Typically, that means the lenders are not paid anywhere near what they are owed.

    What Are Your Options with Your Secured Debt in Your Bankruptcy Filing?

    If, after reading this, you are wondering if you might be able to emerge from this bankruptcy process in a healthy spot, with the keys to your house and car in hand, the answer might just be yes. There are many considerations that you will have to weigh before that becomes a reality, such as whether you can actually keep up with those payments after your bankruptcy filing is complete. You will also want the assistance of an experienced attorney to talk through what paperwork is necessary to evince those intentions to the lenders, as well as negotiate with the lenders on how to catch up on any past due payments and stay current throughout your bankruptcy filing so that you can keep that property past the end of your case. Get in touch with us today for a consultation with a bankruptcy attorney who can discuss keeping your secured debt and a fresh start on your financial future.

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