Secured and Unsecured Debts in Bankruptcy Law

 Posted on May 03, 2024 in Bankruptcy

Filing for bankruptcy can provide relief and a fresh financial start when facing overwhelming debt. However, not all debts are treated equally in bankruptcy proceedings. Understanding the distinction between secured and unsecured debts is crucial for making informed decisions about your bankruptcy case. A North Carolina lawyer can help you determine which option may be the most ideal for your situation.

Secured Debts: Collateral at Stake

A secured debt is one backed by collateral, which is an asset that serves as security for the loan. Common examples of secured debts in North Carolina include mortgages, car loans, and certain types of personal loans.

If you default on a secured debt, the creditor has the legal right to seize and sell the collateral to recover the outstanding balance. This process is known as foreclosure or repossession, depending on the type of collateral involved.

In a bankruptcy case, secured creditors have priority over unsecured creditors when it comes to distributing assets or payments from the debtor. This means that if you file for bankruptcy, you must continue making payments on your secured debts or risk losing the collateral.

Dealing with Secured Debts in Bankruptcy

When filing for bankruptcy in North Carolina, you have a few options for handling secured debts:

• Reaffirmation: You can choose to reaffirm the debt, essentially agreeing to continue making payments and retain ownership of the collateral.

• Redemption: In some cases, you may be able to pay the creditor a lump sum equal to the current value of the collateral to keep the property.

• Surrender: If you no longer wish to keep the collateral, you can surrender it to the creditor, effectively eliminating the debt.

Unsecured Debts: No Collateral Involved

Unsecured debts, on the other hand, are not backed by any collateral. Common examples of unsecured debts include credit card balances, medical bills, personal loans, and utility bills.

Since there is no collateral involved, unsecured creditors have a lower priority in bankruptcy proceedings compared to secured creditors. If you file for Chapter 7 bankruptcy, most unsecured debts are typically discharged (eliminated), providing you with a clean slate.

Prioritizing Unsecured Debts

It is important to note that not all unsecured debts are treated equally in bankruptcy. Some unsecured debts, such as child support, alimony, and certain tax debts, are considered priority debts and cannot be discharged through bankruptcy.

If you file for Chapter 13 bankruptcy, you may be required to repay a portion of your unsecured debts through a court-approved repayment plan over a period of three to five years.

Contact a Charlotte, NC Bankruptcy Attorney

The decision to file for bankruptcy and the specific chapter you choose can significantly impact how your secured and unsecured debts are handled. Seek the guidance of a Mecklenburg, NC bankruptcy lawyer who can evaluate your unique financial situation and advise you on the best course of action. Call Blossom Law PLLC at 704-256-7766 to start your journey with a free consultation.