When you speak with a bankruptcy attorney, you will be asked how much secured debt you have and how much unsecured debt you have. What is the difference and why does it matter?
Secured debt means the lender has collateral (an asset tied to the debt). Another way of saying this is that the creditor has a lien on your property. If you default, the creditor may be able to repossess the collateral. The most common secured debts are vehicle loans and home mortgages.
When you receive a bankruptcy discharge, most liens will survive. You will no longer have the legal obligation to pay anything toward those debts, but if you stop paying, the creditor will be allowed to enforce its lien by repossession or foreclosure. You can either keep the house/car/other collateral and continue making your payments, or you can surrender the collateral and stop making the payments. The choice is yours. Short version: if you don’t pay on a secured debt, the creditor can take your stuff. Secured creditors either get paid or they get their collateral.
With unsecured debt, there is no collateral tied to the debt. If you default, the creditor may sue you but it can not repossess, foreclose, or otherwise take your property, although a wage garnishment may be allowed. Typical unsecured debts include credit card debt, medical debt, student loans, and personal loans. Tax debts and domestic support obligations (child support, alimony, maintenance, etc.) are usually unsecured, but they often fall into a separate category known as “priority” debts. I’ll write more about priority debts in a future post.
Keep in mind that the secured/unsecured distinction is not a question of dischargeability. Whether or not a debt is secured or unsecured has no bearing on whether or not it is dischargeable. For example, your car loan is a dischargeable obligation, but the lien will survive the bankruptcy. Remember, secured creditors get paid or they get their collateral. And your student loan is probably nondischargeable (although there are exceptions), but it is still unsecured. The secured/unsecured question is one of collateral, not dischargeability.
It’s important to speak with your bankruptcy attorney about your secured and unsecured debts. I’ll write about why the difference between the two matters next time.