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What does secured or unsecured debt mean?

Understanding 'secured' or 'unsecured' debt is important in bankrupty planning.

Knowing the difference between "secured" debt and "unsecured" debt can help people who are considering filing for bankruptcy to understand how a bankruptcy court will handle their property and money that is owed on it.

Secured debt means that money owed on a bill is linked to a tangible asset - a mortgage on a house or an auto loan for a car. In effect, those items are considered collateral for the money that is owed and can be taken back by the lender if the loan becomes delinquent.

If a lender should seize an asset after a bill goes unpaid, they can sell the item. But if the selling price doesn't completely wipe out the bill, they can attempt to recoup the remaining amount from the debtor.

Unsecured debt, such as credit cards, medical bills and student loans, means that creditors cannot take your possessions or property to pay off what is owed to them. However, they may hire a bill collector to attempt to get the debt paid, file a lawsuit or ask a court to order that a debtor's wages be garnished for payments.

How secured debt is handled in bankruptcy court depends on the type of bankruptcy case that is filed.

In a Chapter 7 Bankruptcy, the most common type of bankruptcy filed by individuals, the court gives the debtor a choice to either sell the property to pay their secured debts or keep the property and find another way to pay what they owe. If the bankruptcy court agrees to discharge the debts, the individual no longer has to pay any unsecured loans or credit card bills.

In Chapter 13 Bankruptcy, individuals are allowed to keep their property while they pay the debt in a payment plan set down by the court.

The federal regulations for bankruptcies, as well as those from individual states, allow debtors to exempt a certain amount against major possessions such as a home. In Massachusetts, for instance, the state's homestead exemption is $500,000 for a home where the debtor lives. If the house is worth $350,000 it is fully exempt, but if the value exceeds $500,000, the court will require the debtor to pay the balance by selling the property or finding another way to pay the debt.

Chapter 11 Bankruptcy for businesses works in a similar way to Chapter 13 by allowing debtors to reorganize their finances and keep the property from being taken by their creditors.

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