How bankruptcy will affect your debts

What happens to your debt during bankruptcy depends heavily on the type of debt that you have.

Even in the midst of the much ballyhooed "economic recovery" that has been trumpeted in the media lately, many Washington households are continuing to struggle with debt. If you are in this situation, you may be considering bankruptcy, but would like to know more about what will happen to your debts during the process.

The answer to this question requires a basic understanding of the two types of debt. The first type is secured debt, which is debt where your repayment is secured by collateral. If you fail to make your payments under this type of arrangement, your creditor may take the collateral and sell it. Everyday examples of secured debt are your mortgage and car loan.

Unsecured debt is the other type of debt. In this arrangement, there is no collateral involved. Consequently, when you default on this type of debt, your creditor may not take any property. However, creditors may sue you or hire a collections agency. Some common examples of unsecured debt are credit cards, utilities and medical debts.

What happens to each type during bankruptcy?

Each type of debt is treated differently in bankruptcy, depending on the type of bankruptcy filed. If you file Chapter 7 bankruptcy, virtually all of your unsecured debt is eliminated in as few as three months. Your secured debt, on the other hand, is not eliminated during the Chapter 7 process, so if you wish to keep the collateral, it is necessary to stay current on your payments. Fortunately, this is significantly easier, once you have been relieved of your unsecured debt.

Chapter 13 is a different process than Chapter 7. It involves the formation of a payment plan to repay some or all of your debts over a three to five-year period. Since the bankruptcy laws require you to repay your unsecured creditors only as much as you would have to had you filed Chapter 7 (which is nothing in almost all cases), most of the time, your unsecured debt ends up being discharged once the Chapter 13 process wraps up.

Chapter 13, like Chapter 7, does not eliminate your secured debt. However, Chapter 13 does give you more time to catch up with any missed payments. Any missed payments become part of the payment plan, so you have three to five years to catch up with your mortgage or car loan payments. As a result, this type of bankruptcy is ideal for those struggling with their secured debts that wish to keep their collateral.

If you are struggling with unmanageable debt, bankruptcy may or may not be the best way of escaping your circumstances. To find out whether it is right for you, it is important to speak to an experienced bankruptcy attorney. An attorney can assess your situation and recommend a solution that will protect your best interests.

Keywords: bankruptcy, discharge