Since each type of bankruptcy affects debt differently, it is important to have a basic understanding of the treatment of debt during the process.
If you are considering bankruptcy, you may already know that it can help you with your debt problems. However, your understanding of how it would affect your debt specifically may be less clear. It is therefore to your advantage to have a basic understanding of how bankruptcy affects debts before you file.
In general, how bankruptcy affects debt depends on the type of debt. One type of debt is called secured debt. Secured debt is debt where collateral is pledged in return for an extension of credit. If you fall behind on your payments, the lender may repossess the collateral. This type of debt includes your mortgage and car loan.
The other type of debt is called unsecured debt. As the name suggests, this type of debt does not involve collateral. Instead of repossession, the lender may sue you or hire a collection agency to collect any defaulted payments. Examples of this type of debt are credit cards, medical bills and utilities.
How does bankruptcy affect each type?
Bankruptcy affects the two types of debt in different ways, depending on the type of bankruptcy that you file. In Chapter 7, all unsecured debt is discharged within a few months of filing. However, secured debt is treated differently. Although Chapter 7 can eliminate your personal liability on secured debt, it does not affect the lender’s right of repossessing the collateral, if the debt is not kept current. However, most Chapter 7 filers find it much easier to do this, since they no longer have to worry about repaying their unsecured debts.
In Chapter 13, on the other hand, your debts are consolidated into a payment plan and repaid in monthly installments over a three to five-year period. However, not all of your debts are fully repaid under the plan. For your unsecured creditors, the bankruptcy laws only require you to repay as much as you would have if you had filed Chapter 7. Since this is nothing in most cases, your unsecured debt is eliminated at the end of the three to five-year period, in the majority of instances.
Like Chapter 7, Chapter 13 does not eliminate your secured debt. However, it is advantageous, because it gives you three to five years to catch up on any missed payments on your secured debt. During the repayment period, the lender may not repossess the collateral as long as you continue to make the agreed monthly payments towards your debt. As a result, Chapter 13 is an excellent option for those wishing to keep the collateral.
Depending on your unique situation, bankruptcy may or may not be the best way of dealing with your debt problem. Because of this fact, it is always important for you to consult with an experienced bankruptcy attorney when faced with unmanageable debt. An attorney can consider your situation and recommend the best way to proceed.