Unsecured Debt in Bankruptcy
Recent statistics cite that most Americans carry at least $8,000 in unsecured debt, and paying that debt back on a median income of less than $50,000 a year is difficult to do. Many people are choosing bankruptcy as a way out of their financial troubles. But how does that work? What is unsecured debt, exactly? And what happens to that debt if you choose to file bankruptcy?
First, let’s examine what kind of debt this is. Unsecured debt is not “secured” by any property or collateral, which means that it cannot cause a lien against your property and that your property cannot be taken away from you in order to pay the debt. Unsecured debt includes debts from credit cards and lines of credit, certain medical bills, department store cards, and cell phone bills. In other words, a cell phone company cannot take your cell phone back as payment for your overdue bill, and a department store cannot take back the clothing you purchased from their store to pay your store credit card bill. Unsecured creditors can try to get paid through many means, including the use of collection agencies, letters, phone calls and credit reporting, but they truly have no other legal recourse in getting this debt paid back to them.
In a typical bankruptcy case most, if not all, of your unsecured debt will be canceled when your case is discharged, allowing you a financial fresh start. Under Chapter 7 bankruptcy, however, some of your property might be sold, or liquidated, to pay off some unsecured debts. Some property cannot be sold to pay your unsecured debt, and usually includes your home, your car, and any other property you have that is collateral for a loan. If you are behind in your mortgage or car payments, your home or car may be repossessed by the company who lent you the money to buy them, but they can’t be sold to cover your credit card debt. Once your Chapter 7 case is discharged, though, all remaining unsecured debts will be erased.
The most common chapter to file under, Chapter 13 bankruptcy , allows you to create a debt repayment plan, based on your current or projected income, over the next three to five years. You will be able to keep all of your possessions and property under this chapter, and what’s more, after you’ve made payments to your creditors over those three to five years, any unpaid unsecured debt will be erased.
Bankruptcy is not without hardships, though, and it will still affect your credit score and report for several years. As well, bankruptcy laws change often, and there are many rules and regulations to follow, so it is highly recommended that you work with a bankruptcy attorney when researching your options for eliminating your unsecured debt.