How Does Bankruptcy Affect Secured and Unsecured Debt?
Interviewer: What is secured versus unsecured debt and what will happen in bankruptcy to both of those debts?
Unsecured Debt Is Not Secured by Collateral, Secured Debt, Such as a Home, Is Secured by Collateral
Tanya: An unsecured debt would be a credit card or a medical debt or anything that is not secured by collateral. A secured debt is a debt that is secured by collateral, so a mortgage, the note and mortgage on a home is secured by the home.
Secured Debts Are Subject to Seizure for Non-Payment
If you don’t pay your debt, then the lender can come and take the house to pay off the debt. A car loan is a secured debt. The creditor can come and take the car if you don’t pay to sell and pay off the debt. A pension loan where you own a pension and you’re taking money against your pension is secured with the pension. If you don’t pay the pension loan, they’ll take your pension money.
A Visa card that doesn’t have any money behind it has no security. If you charge $1,500, there’s nothing Visa can take from you to cover that debt.
Unsecured Debts Can Be Collected Through Judgments Obtained by a Lawsuit
One of the reasons why people file for bankruptcy is if the creditor sues you, he will get a judgment against you.
When there is a judgment against you that becomes a secured claim so that judgment then will attach to your house. The creditor can place a levy on a bank account with that judgment or he can take your car because of that judgment, which is the product of the lawsuit.
Other Related Bankruptcy FAQ's
- Common Misconceptions about the Bankruptcy Process
- Will Bankruptcy Filing Stop Lawsuits from Proceeding against You and Negate Any Judgments Already Rendered?
- What happens if there’s a judgment against you and then you file for bankruptcy? What would it do to the judgment?
- What to Avoid If You Are Planning to File for Bankruptcy
- What Are Exemptions to Bankruptcy?