How filing bankruptcy will affect your debts

If you are considering filing bankruptcy, you may have questions about what will happen to your debts during the process. Unfortunately, the answer to this question is complicated, as all debts are not treated the same in bankruptcy. However, the fate of your debts largely depends on whether they are secured or unsecured.

Secured debts are debts where your promise to repay is secured by collateral. If you do not pay secured debts, your creditor may seize the collateral and sell it to cover what you owe. If the creditor is unable to sell it at a high enough price to cover your debt, they may sue you to obtain a judgment for the difference (called a "deficiency judgment"). Common secured debts include car loans and mortgages.

Unsecured debts, on the other hand, involve no collateral. Because of this fact, unsecured creditors generally may not take property from you if you do not pay your debt. However, they may sue you to obtain a judgment and garnish your wages to compel you to pay. Unsecured debts include medical bills and credit card debt.

Secured and unsecured debts in bankruptcy

If you file Chapter 7, most of your unsecured debt ends up discharged. However, Chapter 7 treats secured debt differently. Although it relieves you of the obligation to repay the debt, Chapter 7 does not affect the creditor's ability to repossess collateral. As a result, it is necessary to stay current on your secured debts during Chapter 7, if you would like to keep the collateral. However, if you no longer want the collateral, Chapter 7 protects you against a deficiency judgment.

If, however, you file Chapter 13, both types of debt become part of the payment plan. Under the plan, you pay your debts over a three to five-year period. However, your unsecured debts typically do not need to be repaid in full under the plan, as the law only requires you to pay your unsecured creditors the amount that they would have received if you had filed Chapter 7 instead. Since this is zero in most cases, unsecured debts end up discharged after little or nothing has been paid towards them.

Regarding secured debt, Chapter 13 offers special benefits. Although it does not discharge secured debt, Chapter 13 gives you three to five years to catch up with your delinquent secured debt payments. As long as you continue making the required payments under the plan, you can keep the collateral without fear of repossession. By the end of Chapter 13, you have caught up with your debt payments and resume making the normal payments on them.

Although these rules seem straightforward, there are several exceptions to them in reality. If you are considering bankruptcy, it is advisable to speak with an experienced bankruptcy attorney. An attorney can explain your options to you and recommend the best way to proceed.