What Is Secured and Unsecured Debt? Why Does It Matter in Bankruptcy?

All debts are not alike and when people pursue bankruptcy, the different kinds of debts are treated differently. It is important for people to understand these differences because it may impact how they address certain debts when going into bankruptcy.

Secured Debt

Essentially, debts are divided into two main classes, secured debts and unsecured debts. Debts are considered secured if an item is pledged as collateral for the promise to repay the debt. The collateral is usually something of value such as a home as a car that "secures" the debt. If the debt is not repaid, the lender may reclaim the collateral to pay off the obligation.

Although bankruptcy removes the obligation to pay back cash on a debt owed, it generally does not remove a creditor's right to reclaim the collateral for the debt if it is not paid. The security interest remains. So, although a person is not obligated to continue making car or mortgage payments after filing for bankruptcy, they will want to continue making payments if they wish to keep that asset.

Unsecured Debt

The other kind of debt is called unsecured debt. As the name implies, this debt is not tied to any collateral. Common types of unsecured debt include:

  • Credit cards
  • Medical bills
  • Lines of credit
  • Student loans
  • Unsecured personal loans

Just because these debts are not attached to an asset, it does not mean that a creditor does not have a way to collect what is owed to them. Because these creditors are sitting in a vulnerable position, they frequently try to recover funds by suing a person when the debts are not paid. Once they have obtained a judgment, they may try to levy bank accounts or garnish wages.

Fortunately, people have the option of pursuing bankruptcy. Aside from student loans, almost all of these unsecured debts are wiped away in bankruptcy.

Bankruptcy Helps People With Both Secured and Unsecured Debts

Regardless of whether an individual is pursuing a Chapter 7 or Chapter 13 bankruptcy, debts are still divided as unsecured and secured. How an individual or family deals with their debts will depend on their situation and their needs. An experienced Minneapolis bankruptcy attorney can go through your debts with you, discuss your budget, and review your available options for getting a fresh start.