There are two types of debt in a bankruptcy: secured and unsecured debt. Your lawyer not only helps identify which debts fall into each category but also plays an important part in managing those debts throughout the bankruptcy process. Each type of debt is treated differently, and how your lawyer handles them can affect how much you have to pay or liquidate during bankruptcy. Here is a deeper look at debt classification and a lawyer’s part in managing secured vs. unsecured debt.
What are Secured and Unsecured Debt
Debt classification is one of the earliest steps in the bankruptcy process. Every debt that you have must be identified in the paperwork and will be classified as secured or unsecured.
Secured debt is any debt that is backed by collateral. Your mortgage is an example of this, as your loan is backed by your house. If you fail to pay the mortgage, the bank takes the house as collateral.
Unsecured debt is any debt that is not backed by collateral. Credit card debt, for example, is not backed by anything. If the bank wants its money back, it has to sue you for it.
Why is Debt Classification Important in Bankruptcy?
Debt classification is important because the bankruptcy process places more value on secured debt. Your secured debts, like your mortgage or car loan, usually need to be paid in full. Otherwise, you must forfeit the collateral for those loans.
Unsecured debt is not considered quite as important. In a Chapter 13 bankruptcy, unsecured debts may be discharged, or any plan to pay your debts will focus less on them. This is a good thing for you since the focus is on paying the debts that let you keep your important assets.
What Does This Mean For Your Bankruptcy Filings?
Ultimately, this means that when you file for Chapter 13 bankruptcy and set up a plan to pay your debt, a chunk of your unsecured debt may be discharged immediately. Then, you will focus on the secured debts so that you can keep the resources that you need to make it through bankruptcy. That means paying off resources like your house, car, and critical business assets.
It’s important to note that you don’t have to completely pay off certain assets. For example, you just have to bring your mortgage current again rather than paying off your house. With your steady income, you should be able to afford the payments once the rest of your debt is gone.
Work With a Chapter 13 Bankruptcy Lawyer
Managing Secured vs. Unsecured Debt in a Chapter 13 bankruptcy can be challenging due to multiple debts and proper handling requirements. The bankruptcy lawyers at Kain + Henehan can help you with debt classification so that you can get the best head start coming out of the bankruptcy process. Call Kain + Henehan, bankruptcy attorneys in St. Cloud, Minnesota, at (612) 438-8006 or use the contact form to schedule a consultation about your case.
