Secured or Unsecured: what goes away in a Chapter 7 Bankruptcy?

14 Apr Secured or Unsecured: what goes away in a Chapter 7 Bankruptcy?

Generally there are two types of debts: secured and unsecured.

A secured debt is an obligation that attaches to a piece of property. The property could be your house, your car, or a large screen TV you bought at the local appliance store. Any time you borrow money to pay for something, you usually create a security interest in that item. Thus, when you bought your car on payments, the car company or finance company took the pink slip on your car to make sure you make the payments. That’s the security: you stop making payments; they have the right to take the property.

An unsecured debt is one that has no security attached. It could be a credit card, a doctor’s bill, a loan from the bank, or simply an unpaid phone bill.

Chapter 7 bankruptcy discharges most unsecured debts. It won’t discharge a secured debt unless you’re willing to surrender the security, or make a deal with the secured party to pay them. Sometimes, for example, a mattress company that has a security interest in your mattress would rather have $.50 on the dollar than take back the mattress you’ve been using for over a year.

There are other types of unsecured debts that won’t go away in bankruptcy, such as current tax obligations, student loans, child support, etc. These exceptions to discharge are outlined in section 523(a) of the bankruptcy code.

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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