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Unsecured vs. Secured Debts

Unsecured vs. Secured Debts – Explained

Unsecured Debt vs Secured DebtWhen explaining the benefits that filing a Bankruptcy may have for a potential client, I ask for information regarding the client’s debts to see whether filing bankruptcy even makes sense. Basically I ask so that I may group the debts into two different categories, unsecured debt and secured debt. The reason is that these different types of debts are treated differently in bankruptcy.

Simply put, secured debt is that type of debt which is tied to particular assets which act as collateral for that particular debt. A common type of secured debt would be a car loan or a home loan. In both these cases, if the borrower stops paying on these loans the lender can come in and repossess the asset (or foreclose in the case of a home) to try and satisfy the debt obligation. Repossession and sale of the item may not entirely satisfy the debt owed, and in these cases the lender can go after the borrower for the difference (this also known as the deficiency amount).

Once the collateral tied to the particular debt is sold, that debt is no longer secured. This important fact illustrates just how a debt can change character going from secured debt to unsecured debt. Likewise, an unsecured debt can turn into a secured debt, but that process requires getting a judgment through filing a lawsuit, and then executing on that judgment by attaching a lien to some particular asset.

Unsecured debts are those types of debt which are not backed up by some sort of collateral. Unsecured debts include credit cards, medical payments, personal loans, student loans, and tax debts; these debts remain unsecured until the creditor takes the debtor to court, wins a judgment, and then attaches a lien to the debtor’s property.

Generally speaking, bankruptcy is good to take care of unsecured debts. However certain types of unsecured debts are typically non-dischargeable like student loans, or tax debts (see the links to find out more about the limited circumstances where a debtor can get a discharge of tax debt or student loan debts). Importantly, not all credit cards are unsecured debts, some credit card agreements may have a security agreement which makes the specific items purchased on that credit card, security for the debt incurred (this is common for certain retailers like Sears).

In some cases like where the creditor attaches a lien to a particular asset, or where the particular asset is not worth what it once was, the debt still may be unsecured; this is because a debt secured by collateral, is only secured to the extent of the collateral. If the asset does not have enough equity to satisfy all the debts attached to it, then certain debts may be unsecured. A common example of this is the debtor that has a typical mortgage and a home equity line of credit (HELOC). In the case where the debtor still owes 100k to the first mortgage and 20k to the HELOC with the home being worth 90-100k, the HELOC is basically unsecured because the home value can only satisfy the original mortgage.

The difference in characterizing your debts properly makes having a bankruptcy lawyer crucial when considering filing bankruptcy. If you’re considering filing bankruptcy, give one of our Albuquerque bankruptcy lawyers a call today for a free consultation.

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Albuquerque Lawyers that can assist clients with bankruptcy, business law, criminal defense, divorce, estate planning, family law, personal injury, probate, real estate, taxes and more.
3500 Comanche NE, Bldg. B
Albuquerque, NM
87107
US
Phone: (505) 234-7007
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