People who are drowning in debt may try to decide whether to file for bankruptcy. One factor that comes into the picture when you’re going through this is what type of debts you have. Different debts are treated in different ways when a bankruptcy is filed.
There are two primary categories of debts: secured and unsecured. Understanding these may help you as you work through your bankruptcy case.
Secured debt is backed by collateral, which is an asset that the borrower pledges to secure the loan. Common examples of secured debt include:
- Mortgage loans
- Auto loans
- Secured credit cards or lines of credit
If you fail to pay for a secured debt, the creditor may opt to reclaim or repossess the collateral. Bankruptcy can stop or delay this in some cases, such as a home that’s facing foreclosure.
Unsecured debt is not backed by any collateral. Instead, it is extended based on the borrower’s creditworthiness, which is determined by factors such as their credit score, income, and employment history. Common examples of unsecured debt include:
- Credit cards
- Personal loans
- Student loans
Since there is no collateral to seize if the borrower defaults, unsecured debt is considered to be riskier for the lender. As a result, interest rates on unsecured debt are typically higher than those for secured debt.
When you file for bankruptcy, you must disclose all your debts and assets. This includes secured and unsecured. Some of these might be exempt from the bankruptcy process, so it’s best to work with someone who can help you determine how things will work.