What is Unsecured Debt in Bankruptcy in California?
Unsecured Debt vs. Secured Debt The purpose of a bankruptcy filing is to decrease or eliminate debt that you cannot afford to pay. The chapter of bankruptcy that you file will affect what type of debts you can discharge and even how quickly they can be discharged. For example, a discharge of debt in a Chapter 7 bankruptcy may occur after a couple of months. Alternatively, a Chapter 13 debt discharge could take years. That is why it is important to understand the type of secured and unsecured debts are discharged in different forms of bankruptcy.
Chapter 7 Debt Discharge Secured debt is debt that is tied to a piece of property that can be repossessed in the event of a default. For example, if you neglect to pay your mortgage, the lender will initiate foreclosure proceedings. It is also possible to enter into a secured debt agreement involuntarily, like if the Internal Revenue Service (IRS) issues a tax lien on your home for failure to pay taxes. One important aspect of Chapter 7 bankruptcy is that you can discharge debt that is secured. However, the lender may be able to repossess the property despite the discharge. When you file for Chapter 7 bankruptcy, you must make a plan to handle your secured debts. Most filers opt to return the property to the creditor. However, some debtors may want to keep the property. In cases like this, the debtor must agree to repay the debt after bankruptcy and must negotiate the terms of the repayment. For example, if you want to continue making monthly payments for the property, you must confirm this arrangement with the creditor. Alternatively, unsecured debt is a debt that does not require collateral. For example, credit card debt and medical bills are forms of unsecured debt. As unsecured debt is not secured by collateral, a creditor cannot make a claim against any of your property. Unsecured creditors will typically only receive a distribution if you have property that is nonexempt from the bankruptcy proceedings. This means that the property will be taken and sold to fulfill obligations to unsecured creditors. The following is a list of nonexempt assets that can be sold:
Musical instruments not tied to your business
Newer model vehicles
High-fashion clothing It is important to note that if you do not have assets to sell, an unsecured creditor can file a lawsuit against you instead. If they prevail in their lawsuit, they can collect on the unpaid debt.