In bankruptcy a debtor must classify each of his debts as either secured or unsecured. Many debtors are confused by this distinction, but frequently it's merely the terminology that some find confusing. Once the basic difference is explained to them, nearly everyone readily grasps the difference as a matter of common sense.
Simply put, a secured debt, is one that is backed by property of some kind. This property is also called "collateral" or the "security" for the debt. The most common example of secured debt, with which nearly everyone has some experience, is a car loan. Car loans are almost always "secured" loans, in which the car itself is pledged as collateral for the loan. This means that if the borrower stops making payments or "defaults," the lender can repossess the car. This basic principle is common to any type of secured loan. A home mortgage is of course another common type of secured loan. If the borrower defaults, the mortgage lender can foreclose on the property.
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Unsecured debts are any type of debt that is not backed by any property or collateral. Credit cards are perhaps the most common example of unsecured debts. But any type of debt, including medical bills, and even judgments, are unsecured because the debtor never pledged any collateral when taking the loan. In the case of many such debts, such as medical bills, there was never any loan to begin with.
In bankruptcy, secured debts and unsecured debts are treated very differently. In general, if the debtor desires to keep secured property, then he must continue to make payments, even in a Chapter 7 bankruptcy where no payments would otherwise be made. In Chapter 13, secured debts may in some cases either be included in the payment plan or paid outside of the plan, and which one chooses can determine the length of the payment plan itself.
Always seek the advice of a licensed and experience bankruptcy lawyer when considering whether to file for bankruptcy protection.
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