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Is a car loan a secured debt in bankruptcy?

A car loan is also a secured debt. In addition to these voluntary security agreements, there are some types of secured debts that you might not have agreed to. For example, if you owe taxes, the IRS might get a tax lien against your home. When you file for Chapter 7 bankruptcy, your personal liability to repay a secured debt is discharged.

What are some examples of unsecured debt?

Outside of loans from a bank, examples of unsecured debts include medical bills, certain retail installment contracts such as gym memberships, and outstanding balances on credit cards. When you acquire a piece of plastic, the credit card company is essentially issuing you a line of credit with no collateral requirements.

What are the different types of secured debt?

Common types of secured debt are mortgages and auto loans, in which the item being financed becomes the collateral for the financing. With a car loan, if the borrower fails to make timely payments, the loan issuer eventually acquires ownership of the vehicle.

What is an unsecured loan?

An unsecured loan is a loan that is issued and supported only by the borrower's creditworthiness, rather than by a type of collateral, such as property or other assets. Credit cards, student loans, and personal loans are all examples of unsecured loans.

What are the three categories of debts to file for bankruptcy?

When you prepare your bankruptcy paperwork, you'll need to sort your bills into three categories: secured, unsecured, and priority debts. A creditor who would like to get paid through your bankruptcy must also identify the type of debt when filing a proof of claim in your case. In this article, you'll learn the differences between debt types.

Why won't a secured creditor get a part of it?

Because the secured creditor has a payment mechanism in place, if money is available to distribute to creditors , a secured creditor won't get a part of it. The secured creditor already has a payment mechanism in place.

What is collateral in a loan?

This type of obligation is guaranteed by property known as "collateral." The debt contract gives the lender an ownership interest in the collateral called a "lien." The lien remains until the borrower repays the loan. If the borrower defaults on the loan, the lender can use the lien rights to recover the property.

Why can't you keep collateral in bankruptcy?

When you file for bankruptcy, you eliminate your obligation to pay the debt owed to the secured creditor. But you don't get to keep the collateral necessarily. Why? Because the lien will remain. Even though the creditor can't force you to pay, it can still foreclose or repossess the property. Here's how it works

What does bankruptcy mean for debt?

In bankruptcy, the debt type determines several things, including: whether the debt gets discharged (wiped out) the amount a creditor gets paid, and. your responsibilities if you want to keep property. These responsibilities also vary depending on if you file for Chapter 7 or Chapter 13 bankruptcy.

How to keep a property after bankruptcy?

If you're going to keep the property, you must continue making the creditor happy —in other words, by making regular payments on it. You'll do so either informally (some lenders will accept payments even after bankruptcy erases the contract) or after entering into a new contract, called a reaffirmation agreement.

How much is the balance owed in Chapter 7?

The balance owed is $75,000 and the debtor can exempt $25,000. In this case, the Chapter 7 trustee would sell the home, pay off the $75,000, thereby making the lender whole, give the debtor the $25,000 exemption amount, and use the remainder to pay unsecured creditors.

What are some examples of unsecured debt?

Outside of loans from a bank, examples of unsecured debts include medical bills, certain retail installment contracts such as gym memberships, and outstanding balances on credit cards. When you acquire a piece of plastic, the credit card company is essentially issuing you a line of credit with no collateral requirements.

What is an unsecured loan?

If the borrower defaults on this type of debt, the lender must initiate a lawsuit to collect what is owed. Lenders issue funds in an unsecured loan based solely on the borrower's creditworthiness and promise to repay.

Why is unsecured debt higher than secured debt?

An unsecured debt instrument like a bond is backed only by the reliability and credit of the issuing entity, so it carries a higher level of risk than a secured bond, its asset-backed counterpart. Because the risk to the lender is increased relative to that of secured debt, interest rates on unsecured debt tend to be correspondingly higher.

What is secured debt instrument?

A secured debt instrument simply means that in the event of default, the lender can use the asset to repay the funds it has advanced the borrower. Common types of secured debt are mortgages and auto loans, in which the item being financed becomes the collateral for the financing.

What is the difference between secured and unsecured debt?

The primary difference between the two is the presence or absence of collateral, which is backing the debt and a form of security to the lender against non-repayment from the borrower.

Why do mortgage lenders require insurance?

By protecting the property, the policy secures the asset's worth for the lender. For the same reason, a lender who issues an auto loan requires certain insurance coverage so that if the vehicle is involved in a crash, the bank can still recover most, if not all, of the outstanding loan balance.

Why do unsecured loans have astronomical interest rates?

An unsecured loan to an individual may carry astronomical interest rates because of the high risk of default, while government-issued Treasury bills (another common type of unsecured debt instrument) have much lower interest ...

How to handle secured debts in Chapter 7?

As part of your Chapter 7 paperwork, you will have to tell the court and your creditors how you want to handle your secured debts. The simplest option is simply to give back the property. If you want to keep the property, you will have to reaffirm the debt (agree that you will still owe it after your bankruptcy is over), redeem the property (pay the creditor its fair market value), or, if the creditor agrees, keep the property and continue making payments. (For more on these options, see Understanding the Statement of Intention in Chapter 7 Bankruptcy .)

What is secured debt?

A secured debt is one that is secured by property, which the creditor can take if you default. For example, your mortgage is secured by your home. If you default on your loan, the lender can sell your home to repay your debt. A car loan is also a secured debt. In addition to these voluntary security agreements, there are some types of secured debts that you might not have agreed to. For example, if you owe taxes, the IRS might get a tax lien against your home.

What happens to debts in Chapter 7?

What happens to each of your debts in Chapter 7, including whether those creditors are paid, whether the debts are wiped out, and whether you have any continuing obligations once your bankruptcy case is over, depends on whether they are secured or unsecu red, and whether they are considered priority debts.

What happens if you owe $5,000 on a car?

For example, if you owe $5,000 on a car that's worth $9,000, the holder of your car note will receive its $5,000, and the remaining $4,000 will be distributed to your unsecured creditors.) Unsecured creditors are paid in order of priority. Priority debts are those that, for public policy reasons, are repaid first.

What happens if you have a nonexempt property?

If you have any nonexempt property, the trustee will take it, sell it, and distribute the proceeds to your unsecured creditors. (If the property is the security for a debt, the secured creditor will be paid first. For example, if you owe $5,000 on a car that's worth $9,000, the holder of your car note will receive its $5,000, ...

What happens if you file Chapter 7 bankruptcy?

When you file for Chapter 7 bankruptcy, your personal liability to repay a secured debt is discharged. However, the creditor still has the right to take back the property securing the debt. For example, if you have defaulted on your mortgage, ...

What is priority debt?

Priority debts are those that, for public policy reasons, are repaid first. These include child support, spousal support, money you owe to employees, and tax debts. If any money is left after your priority debts are paid, it will go to your other unsecured creditors, such as credit card companies.

Why is bankruptcy considered secured debt?

In bankruptcy, certain obligations are referred to as secured debts because the creditor has a lien on a piece of property you pledged as collateral. Simply receiving a bankruptcy discharge doesn't automatically eliminate a creditor's lien from your property. Even if you receive a discharge, secured creditors retain their right to foreclose on or repossess your property if you default on the obligation.

What is the easiest debt to eliminate in bankruptcy?

In general, nonpriority unsecured debts are the easiest obligations to eliminate in bankruptcy because they receive no special treatment under the law. If a nonpriority unsecured creditor wants to challenge your discharge, it must typically prove that you committed fraud when you obtained the debt.

What happens when you strip a junior lien?

When you strip a junior lien, it's treated as a nonpriority unsecured debt in Chapter 13 bankruptcy and wiped out when you receive your discharge. For more information on lien stripping, see How to Strip a Second Mortgage or HELOC in Chapter 13.

How to remove a junior lien from a home?

If your first mortgage (or other senior lien) balance exceeds the value of your home, you may be able to remove a junior lien (such as a second mortgage) from your home through a process called lien stripping. When you strip a junior lien, it's treated as a nonpriority unsecured debt in Chapter 13 bankruptcy and wiped out when you receive your discharge.

What debts can you wipe out in Chapter 13?

The following are some of the most common nonpriority general unsecured debts you can wipe out in Chapter 13 bankruptcy: most types of lawsuit judgments (be aware that a Chapter 13 discharge will not eliminate any debts arising out of willfully and maliciously injuring another person), and. outstanding utility bills.

What is a cramdown in bankruptcy?

A Chapter 13 bankruptcy cramdown allows you to reduce the principal balance (or interest rate) you owe on a secured loan. But you must satisfy certain requirements before you can cram down a secured debt. If you qualify, the loan will be divided into secured and unsecured portions.

How does a Chapter 13 loan work?

If you qualify, the loan will be divided into secured and unsecured portions. You will pay the secured portion in full through your Chapter 13 plan. The unsecured portion will be treated as a nonpriority unsecured debt and any unpaid amount will be discharged at the end of your bankruptcy.

What debts are priority debt?

For instance, "priority" debt gets special treatment—it's paid first. Domestic support obligations and tax debt are common examples. You'll remain liable for many types of priority debt after a Chapter 7 bankruptcy case.

What is pre-petition debt?

Here's how it works. Pre-filing debt. A pre-petition debt is an obligation incurred before the day that you file for bankruptcy. At the end of your case, the bankruptcy court will discharge all qualifying pre-petition debt, such as credit card balances, personal loans, and medical debt. Post-filing debt.

What is the form E/F for bankruptcy?

When you fill out the bankruptcy paperwork, you'll list both priority and nonpriority unsecured claims on official form E/F: Creditors Who Have Unsecured Claims —and you can use the form to help you understand the different types of debt.

How long does it take for a bankruptcy to be discharged?

In other words, the debtor is no longer legally required to pay any discharged debts. Most Chapter 7 filers automatically receive a discharge about four months after filing the bankruptcy petition.

What happens if you file Chapter 7 bankruptcy?

Most people file for Chapter 7 bankruptcy to discharge (wipe out) debt. Although some debts are "nondischargeable" and don't go away in bankruptcy, Chapter 7 will erase many obligations, the most common being medical and credit card debt. In this article, you'll learn: how a Chapter 7 discharge will eliminate bills.

What are the things that are considered a repossession?

medical bills. personal loans from friends, family, and employers. utility bills (past due amounts only) dishonored checks (unless based on fraud) student loans (only in the rare circumstance that you can prove undue hardship) repossession deficiency balances.

Can you discharge unsecured debt?

Bills you can discharge usually fall into the "nonpriority unsecured" debt category. (Unsecured debt isn't guaranteed by collateral. By contrast, a home mortgage or car loan is an example of secured debt.) But a few nonpriority unsecured debts don't get wiped out. For instance, you won't be able to get rid of student loan balances in bankruptcy unless you file a separate lawsuit and prove that you satisfy stringent standards.