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Chapter 7 Bankruptcy Laws: Secured vs. Unsecured Debts

Chapter 7 Bankruptcy Laws: Secured vs. Unsecured Debts

In Chapter 7, a bankruptcy discharge eliminates some debt. Chapter 7 bankruptcy laws determine which debt is eligible for discharge. The court will discharge some debt, while other debt will survive. A debtor will include secured and unsecured debt in a bankruptcy petition.

Secured Debt:

Secured debt is debt secured by collateral. For instance, a mortgage, which is secured by real property, or a car loan, which is secured by the car, is secured debt. When a debtor defaults on the loan, the creditor has the right to take the property that secures the debt. says California Bankruptcy Lawyer Steven C. Peck.

In Chapter 7, a debtor must decide how to the court will treat the secured debt. The debtor can reaffirm, redeem, or surrender the property. The debtor can keep the property by reaffirming the debt. This means that the debtor has entered into a new agreement with the creditor. The debtor can also keep the property through redemption. To exercise the right of redemption, the debtor must pay the creditor the current replacement value of the property. Lastly, if the debtor does not wish to keep the property, the debtor can surrender it by giving it back to the creditor.

A bankruptcy trustee may take a debtor’s home and sell it to pay unsecured creditors. A debtor may not be able to keep their home if the equity exceeds the homestead exemption. A homestead exemption allows a debtor to keep a certain amount of equity. The amount varies according to the guidelines in each state. If nonexempt equity exists, the trustee can sell the home and use the nonexempt equity to pay unsecured creditors. If the homestead exemption protects all of the equity, the trustee cannot sell the home.

Unsecured Debt:

Unsecured debt is debt that is not secured by collateral. This means that the creditor does not have the right to take a debtor’s property when a default occurs. Credit card debt and medical bills are examples of unsecured debt.

Chapter 7 will eliminate most unsecured debt. Unsecured debt not eligible for discharge includes spousal and child support, student loans, recent tax debt, debt incurred by fraud, recent debt for luxury items, and court judgments arising out of intoxicated driving cases. After the court issues a discharge order, the debtor is no longer responsible for the debt. Unsecured creditors may not collect the debt from the debtor, but the creditor can go after the cosigner.

The Peck Law Group

About the Author

Attorney Steven Peck has been practicing law since 1981. A former successful business owner, Mr. Peck initially focused his legal career on business law. Within the first three years, after some colleagues and friend’s parents endured nursing home neglect and elder abuse, he continued his education to begin practicing elder law and nursing home abuse law.

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