The bankruptcy process is quite helpful for many people dealing with financial hardship. Designed to provide relief for many types of debt, there are some specifics you should know about your debts and how they could be managed in bankruptcy.
Types Of Debt
The most common source of debt in bankruptcy is unsecured debt. These debts are called “unsecured” because they lack collateral for default. In other words, there is no asset tied to these debts that can be seized for liquidation if you fail to pay. Credit cards, utility bills, medical bills, some loans and domestic support obligations are all examples of unsecured debt. However, it doesn’t mean they are all treated the same. Credit cards, utility bills and medical bills are easily discharged in either Chapter 7 or Chapter 13 bankruptcy. Student loans and domestic support obligations are also considered unsecured debts, but these are generally not eligible for bankruptcy. In the rare case they are accepted by the court, they would only be eligible for Chapter 13 repayment plan assistance.
Secured debts are those in which an asset is used as collateral on the loan, which can be seized and liquidated in the event of default. Car loans, mortgages, title and payday loans are common examples of secured debts. While all of these are typically eligible for bankruptcy protection they are often better served in Chapter 13, where the debts are repaid over time. The reason is that the asset used as collateral is better protected when these debts are repaid rather than erased in Chapter 7. Although tax debts are not secured against any particular asset, the IRS does have a right to place a lien on your property in order to collect on the debt. Tax debts are an unofficial secured debt, and are also tricky to have included in a bankruptcy.