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If you’re considering bankruptcy, one factor is particularly critical in determining which type of bankruptcy—if any—will solve your financial crisis. This factor is whether the debt you owe is secured or unsecured.
Secured debt is anything that is backed by collateral, such as:
Unsecured debt is anything that is NOT backed by collateral, such as:
This distinction is important because bankruptcy typically only discharges unsecured debt. This is partly why unsecured creditors charge high interest rates. The money they earn from interest compensates for the risk they take, as they may get nothing from the court if you file bankruptcy.
If most of what you owe is secured, bankruptcy still could be a viable option. Many people file Chapter 13 bankruptcy, for example, to save their homes from foreclosure. Because of the automatic stay, your lender cannot initiate or continue foreclosure for the duration of your case. This gives you 3-5 years, therefore, to catch up on arrears (in addition to making regular payments) by the end of the repayment plan.
Furthermore, the bankruptcy court could even “cramdown” a secured loan, such as a mortgage. A cram-down is when the court converts a portion of debt from secured to unsecured status. If you are underwater, meaning you owe more on a home or vehicle than its fair market value, the court can convert any amount of debt that exceeds the fair market value into unsecured debt. That unsecured debt can then be discharged at the end of the 3-5-year repayment plan. A high interest rate can also be crammed down to a court-approved interest rate.
The court can strip a lien from your property in a similar fashion. If a lien is attached to your home, for example, the court can convert the value of the lien to unsecured debt, thereby qualifying it for discharge.
Ultimately, your decision to file bankruptcy should be informed by whether the court is likely to discharge a substantial amount of debt, or if the relief from the automatic stay could give you the time you need to catch up on late payments. Understanding how the court may treat certain types of debt you owe is critical in making a sound decision.
Filing bankruptcy might be the best possible solution, but you will need help from seasoned legal professionals who can thoroughly assess your case. At Bach Law Offices, Inc., our attorneys have more than 40 years of experience, and we can efficiently and effectively develop the plan you need to obtain freedom from debt. When you bring your case to our firm, you can trust us to handle your financial future with commitment, care, and skill.