The difference between secured debt and unsecured debt is an issue that I bring up with every single one of my bankruptcy clients here in the Oakland-East Bay area. The basic difference is this: Secured debt involves collateral as well as the obligation of the person who signed the loan documents, while unsecured debt just involves the personal obligation of the person who signed up for the loan. In the United States, the collateral we’re most familiar with in consumer (non-business) situations is either a car or a house.
The idea is that the collateral provides an additional assurance to the lender that it will get repaid what it is owed. For instance, while a bank might hesitate to loan Average Joe $50,000 based only on Joe’s signature, that same bank might be more willing to consider lending the money when it gets to use the new Made-In-America pickup that Average Joe is going to buy with the $50,000. The pickup acts as collateral which means that if Average Joe doesn’t make the payments, the bank can repossess the pickup, sell it and then use the proceeds (the money from the sale) to pay off or at least pay down the loan.
It’s the same with a home loan. The house itself is the collateral for the loan. If the borrower fails to make payments, the bank can begin a process of selling the house called foreclosure. When the house sells in the foreclosure, the bank uses the proceeds to pay off or at least pay down the loan.
So why does this all matter in bankruptcy? Well, bankruptcy wipes out personal liability (an individual’s legal responsibility to pay) on debts, but in most cases, it doesn’t wipe out the bank’s right to go after collateral. That right to go after collateral is called a lien, a french word that means a leash. Basically the bank holds your car or your house by a leash. If you don’t pay, they grab a hold of that leash and yank the collateral out for from underneath you.
[There are, however, times when a bankruptcy can wipe out a lien as well as personal liability. One of those times is when you have a second mortgage or a line of credit on your house and the home has lost a lot of value. If the circumstances are right, you can wipe out that lien in a chapter 13. Click here to learn more.]
So for most unsecured debt, you file bankruptcy, get your discharge and your liability is wiped out forever. You’ll never have to pay on that debt again, the lender can no longer do anything to collect on it. For secured debt, while the discharge wipes out your personal liability, you will still have to decided whether you want to keep the collateral or give it up. If you want to keep it, you will have to continue making the payments. If you don’t want to keep it, you can give the collateral back to the lender that will be the end of it. Since your personal liability has been wiped out in your bankruptcy case, giving the collateral back to the lender means that the lender no longer has any power to collect on that debt from you.
When you meet with bankruptcy attorney James Pixton, one of the things he’ll discuss with you is what you want to do with loans and collateral. If you want to keep the collateral there are a few different options. Go ahead and make an appointment today. Call (510) 451-6200 or fill out the handy form below:
