What will happen to my debts during bankruptcy?
How bankruptcy will treat your debt depends on the type of debt and which bankruptcy you file.
According to the Urban Institute, many South Carolinians continue to struggle with debt. The latest figures indicate that 46.2 percent of residents in the state have debts that are in collections. As a result of the dire financial situation many find themselves in, many people are considering bankruptcy at a means of relieving many of their debts. However, before seeking its protection, it is important to first have a basic understanding of how bankruptcy affects debt.
In general, there are two types of debt: secured and unsecured. Secured debt is debt where your promise to pay is secured by collateral. In this type of debt, if you do not make payments, the lender can take the collateral back by foreclosure or repossession and sell it to satisfy your debt. Common types of secured debt are mortgages and car loans.
Unsecured debt does not involve collateral, so there is no immediate threat of losing property. In this type of debt, the creditor will typically file a collections lawsuit or turn the debt over to a collection agency if it becomes delinquent. This type of debt includes credit cards, medical bills and personal loans.
Bankruptcy ‘s treatment of debt
Each type is treated differently in bankruptcy. What happens to each type largely depends on the type of bankruptcy filed. In Chapter 7 bankruptcy, almost all unsecured debt is discharged, which forever eliminates your obligation to repay it. However, secured debt is treated differently. Although Chapter 7 can wipe away your obligation to repay the debt, it does not take away the creditor’s right to repossess the collateral. Because of this, if you would like to keep the collateral, you must keep the secured debt at issue current during Chapter 7. Fortunately, many people are able to do this once relieved of their unsecured debt.
Chapter 13 bankruptcy involves the formation of a payment plan to repay certain debts over a three to five year period. However, not all debts are fully repaid. Under the bankruptcy laws, payment plans only need to give unsecured creditors the amount that they would have received in Chapter 7. Since this amount is usually zero, most unsecured debt ends up being discharged at the end of Chapter 13.
For those having problems keeping up with their secured debts, filing Chapter 13 can significantly increase their chances of keeping the collateral. Under the repayment plan, the filer has three to five years to catch up with any missed payments on their secured debts. Creditors are legally prohibited from taking the collateral (i.e. foreclose or repossess) in the meantime, as long as the filer makes a payment towards the outstanding debt each month. By the time that bankruptcy is over, the filer has made enough monthly payments to be current on his or her secured debts.
If you are receiving harassing phone calls or letters regarding debt that you cannot afford to pay, bankruptcy may be able to help you regain a peaceful financial life. An experienced bankruptcy attorney can help you explore your options and recommend the best course of action for your situation.
Keywords: bankruptcy, secured and unsecured debts