Two Main Types of Debt: Secured and Unsecured

When it comes to bankruptcy, not all debts are equal; meaning that bankruptcy will treat different types of debt differently. Generally, two types of debt are considered during the bankruptcy proceeding: secured and unsecured debt.

Secured debt is any debt that uses a tangible piece of real or personal property as collateral for the loan (the property is tied to the debt). Examples of secured debt include mortgages, mechanics liens and car loans. Because this type of debt is "secured" by the object the loan is for, if you default on payments the lender can, among other possible remedies, repossess or seize the property, or force you to sell it to cover the cost of the outstanding debt.

Unsecured debt is not secured by a specific piece of personal or real property. Instead, when a debtor defaults, the loan holder must sue the debtor asking for recourse from the court - often through wage garnishment, meaning payments toward satisfaction of the loan would be withheld from the debtor's paycheck. Examples of unsecured debt include credit-card and medical bills.

Understanding the difference between these two debt types is important to know before filing for bankruptcy, as is how the two main forms of individual bankruptcy - Chapters 7 and 13 - will treat these debts. Specifically, how the two types of bankruptcy handle secured debt may determine whether or not you are able to keep certain property.

To eliminate secured debt through Chapter 7 bankruptcy you may be required to sell the secured property to pay the debt owed or given the option to surrender the property in satisfaction of the debt.

On the other hand, Chapter 13 bankruptcy may allow you to keep most if not all of your property. Even if you have missed payments on a secured debt, Chapter 13 bankruptcy allows you time to catch up on missed payments and make the debt current over a three- to five-year repayment period.

It is also important to remember that the law recognizes that a lot of property is necessary for people to live, including a house, clothing and a vehicle. So, the law allows a person filing for bankruptcy to "exempt" this property up to a certain dollar amount. For example, in Wisconsin, the law allows a person a homestead exemption of $75,000. This means that if your home is valued at $75,000 ($150,000 if a married couple jointly files for bankruptcy) or less, you will not be forced to sell your home to satisfy debts. If your home is worth more than $75,000, you may be required to sell your home, and any profits above the exemption amount will be used to satisfy debts.

In reality, classifying debts as unsecured or secured, and how those debts may or may not be treated by the different chapters of bankruptcy is complicated. An experienced bankruptcy attorney can help answer all of your questions about debt and debt forgiveness, and help you find the path to financial relief that is right for you and your family.