When a person is considering filing for chapter 7 or chapter 13 bankruptcy, terms like “secured creditors” and “unsecured creditors” are often thrown around effortlessly. But, what exactly is the difference? This distinction is very important because bankruptcy often provides more protection against unsecured creditors than you would likely find with secured creditors.
Generally speaking, a secured creditor is a person or organization who has a right to sell an asset if you ultimately do not repay the debt. The most common example, of course, is the lender that financed your home mortgage. This lender is a “secured creditor” because they can sell your house to satisfy the mortgage debt if you do not make your monthly payments. Another common example is when you finance your car. The lender that financed the car note is secured because the car can be re-possessed and sold to satisfy the debt if you do not make your payments.
An unsecured creditor is the opposite, the person or organization does NOT have a right to sell any of your assets if you fail to repay the debt. The most common example of an unsecured creditor is a credit card company. If you do not pay the line of credit, the company cannot take and sell any of your property in order to satisfy the debt.
Unlike debt with a “secured creditor”, debt with an unsecured creditor can be easily eliminated through a bankruptcy plan. For example, a chapter 7 bankruptcy plan might discharge a debt with an unsecured creditor but it might not be able to automatically discharge all of your mortgage debt. However, although your mortgage may be with a secured creditor, there are often strategies you or your attorney can take to settle your mortgage debt through a bankruptcy plan.
When considering bankruptcy, it is wise to speak with an attorney to better understand your legal options. At the Packard Law Firm, you can schedule a free consultation with a board-certified bankruptcy lawyer to discuss your particular circumstances.