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Unsecured or secured debts: What’s the difference?

On Behalf of | Apr 6, 2020 | Chapter 13 Bankruptcy

You’ve been looking over your checking account, and you know that you just won’t have enough to make ends meet this month. You’re having to make the decision to pay for food over rent, gas for your vehicle to get to work over your utilities. You’ve been struggling for a while, but things are particularly bad at the moment. You’ve started looking into bankruptcy, but you want to know that it can really help. There’s no point if it will only make your situation worse.

If you start looking into bankruptcy, something you’ll be interested in learning more about is what kind of debt you can discharge. There are two forms of debt, secured and unsecured. In most cases, it’s only unsecured debts that can be erased during bankruptcy, though there may be exceptions.

What is a secured debt?

Secured debts are backed by collateral, so that there is a lower risk of the lender being left without compensation for the loan. For example, a mortgage is a secured loan. If you default on your payments for long enough, the bank may then seize your home and sell it to pay back the debt that’s owed (this is what happens with a foreclosure).

What are unsecured debts?

Unsecured debts have no collateral backing them. Credit cards are normally unsecured. With these kinds of credit lines, the lender is taking a real risk, because there is a chance that a person could default and that the lender could be left with no compensation.

Unsecured loans are based on your credit score. They also usually have higher interest rates, and the bank or lender may review your debt-to-income ratio to decide if you can afford to pay back what you borrow.

What are some common kinds of unsecured debts?

  • Medical bills
  • Gym memberships or retail installment contracts
  • Balances on credit cards

What are common secured debts?

Some common secured debts are things like mortgages or auto loans.

Bankruptcy can’t eliminate all debts

Student loans, taxes and support payments, like child support or spousal support that is owed, usually cannot be discharged in bankruptcy.

As you learn more about bankruptcy, you should compare the debts you have to the types of debt above. If you primarily have unsecured debts, then a bankruptcy could be an excellent option for you. You might want to talk with an attorney about debt-reduction methods or ways to reduce what you owe, which might include filing for bankruptcy.


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