For most, a debt discharge is the ultimate goal of bankruptcy. When the court discharges your debt, you are permanently released from liability for that debt, and creditors can no longer attempt to collect it by any means. This freedom is invaluable, and the clean slate allows individuals and families to build better financial futures.
Unfortunately, bankruptcy will not automatically eliminate all your debt. Some debts are not dischargeable at all, and some are very difficult to discharge.
Secured vs. Unsecured Debt
The critical distinction to make as you determine whether bankruptcy may eliminate your debt is whether your debt is secured or unsecured.
Secured debt is anything that is attached to collateral. With a mortgage or car loan, for example, the debt you owe is secured by your home or vehicle. If you fall behind on payments, your lender can usually take your home or vehicle (through foreclosure or repossession, respectively) without taking you to court first. You agree to this stipulation when you purchase the asset.
Unsecured debt is anything that is NOT attached to collateral. This can include:
- Medical debt
- Most credit card debt
- Payday loans
- Utility bills
Because the unsecured creditor has no contractual right to seize your property, their only option is to take you to court and obtain a judgment against you, which may allow them to garnish your wages, freeze your bank account, and more.
Unsecured debt can become secured if your creditor attaches a lien to your property. A lien is a creditor’s legal claim to a property resulting from an unpaid debt. This is typically the result of a lawsuit (unless your creditor is the IRS, which can place a lien on your property without taking you to court first). If you don’t satisfy the judgment (i.e. pay what you owe), the creditor can seize and sell the property attached to the lien.
Why Does It Matter Whether Your Debt Is Secured or Unsecured?
If you’re considering bankruptcy, the distinction between secured and unsecured debt is important because bankruptcy can only discharge certain unsecured debts. If you owe secured debt, the automatic stay triggered by bankruptcy will temporarily keep creditors from seizing the properties attached to that debt, but they can resume this collection process as soon as your case ends—unless you caught up on arrears during your case.
This is why people who owe mostly secured debt choose to file Chapter 13 bankruptcy. Chapter 13 (and, subsequently, the automatic stay) lasts for 3-5 years, giving the filer time to catch up on late payments or even negotiate with their lenders for a loan modification. Chapter 11 offers a similar opportunity for business owners (and, in some cases, individuals who owe too much to qualify for Chapter 13).
Other Non-Dischargeable Debts
The Bankruptcy Code also lists child support, alimony, fines, penalties, and several other types of debts as non-dischargeable. Additionally, you may have trouble with tax debt and student loans. While tax debt and student loans can technically be discharged through bankruptcy, it is difficult to do so.
Find Your Debt-Relief Solution Today
As you can see, the type of debt you owe can play a significant role in which chapter you file or even whether you file bankruptcy at all. Bankruptcy might still be an option, however, even if your debt is not dischargeable. Chapters 11 and 13, for example, allow debtors to restructure their debt and establish a reasonable repayment plan, all of which occurs while the automatic stay keeps creditors at bay.
For personalized guidance regarding your financial crisis, come to the US Legal Group, APC. Our Orange bankruptcy lawyers have decades of experience helping clients resolve their financial difficulties through bankruptcy and other means. We can assess your situation and help you devise a strategy to achieve financial freedom as soon as possible.
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