For people here in Michigan who are considering filing for bankruptcy, debt is a very real, and often overwhelming factor in their daily lives. But not all debt is created equal – there are actually at least two different kinds. And knowing the difference between the two matters, especially when your bankruptcy attorney is prioritizing your debts during payoff, if indeed there is going to be any payoff. The two basic types are unsecured debt, and secured debt. (There are also some more categories like priority debts and non-priority debts, and non-dischargeable debts, but we’ll save that all for a different bankruptcy blog.)
We’ll be breaking those two basic categories down for you here, in the hopes of helping you understand how the two different kinds may impact your bankruptcy plans. Obviously reading our bankruptcy blog is no substitute for getting advice directly from our bankruptcy attorney. So, don’t make any decisions, ever, by relying alone on something you read on the internet.
Secured debts are debts that are connected to an underlying asset. In other words, debt that is the direct result of purchasing something, or a creditor having a lien on something, that is considered to be an asset. Examples of this type of debt would be:
- A house
- A vehicle (this could include a car, truck, motorcycle, ATV, etc..)
- A boat
- Land or property
- A collection worth money (this includes any kind of valuable collections, like coins or stamps, or even art)
Because the item is purchased on a loan, or because you have pledged the asset as collateral, the lender places a lien on the asset. This gives them the right to reclaim the asset in the event that you default on your payments, or stop paying altogether. In the event that a lender reclaims (forecloses on) the item because you are delinquent on your payments, the lender usually attempts to sell the item in order to recoup some of their losses. In the event that the selling price doesn’t cover the item’s value, they may still come after you for the difference.
Your mortgage payment and your car loan are very standard examples of secured debts. If you stop paying your mortgage payment, the bank can foreclose on your home and eventually have you evicted. If you stop making your car payment, the bank (or dealership, if you got the loan from the same place that sold you the vehicle) can repossess your car.
It is important to remember that if you take out a loan to pay off a physical, tangible thing, you often do not fully own it until you have paid it off completely. Once you’ve paid off your home or car (or other items) you will be given the title stating that you own it free of the lein or mortgage.
Unsecured debts are debts where the lenders don’t have any rights to the asset, because the debt isn’t secured by reclaimable assets. This means the money you owe isn’t connected to specific items that can be reclaimed. Examples of this kind of debt would include:
- Credit card debt
- School loans
- Unpaid medical bills
- Court-ordered child support (which cannot be discharged in bankruptcy)
How does the difference affect you?
The most important difference, when a person is struggling with money, is to to prioritize which debts should be paid first. Obviously, if you are having financial difficulties, the debts you should prioritize are your secured debts. Not paying your student loans will have far less of an immediate impact on your life than not paying your mortgage. However, if you are even considering bankruptcy, you should stop paying your bills and immediately consult with our bankruptcy attorneys. This is because the law does not allow you to favor one creditor over another in the period of time leading up to the filing of your bankruptcy.
However, each person’s financial situation is different, and yours may need very specific solutions that only the skilled bankruptcy attorneys at The Kronzek Firm can help you with. If you are struggling with debt, and are considering filing for bankruptcy, call The Kronzek Firm at 866 766 5245. We have helped many Michigan residents successfully resolve their financial difficulties over the decades. We can help you too!