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Santa Ana Bankruptcy Attorney Explains Secured Versus Unsecured Debt

March 5, 2009

If you're considering bankruptcy, you probably didn't get too far into your research before you found references to secured or unsecured debt. Most people don't know the difference, but as Orange County bankruptcy attorneys, we can tell you that which type of debt you have is very important. Whether your debt is secured or unsecured can dictate whether you file at all, and if you file, which kind of bankruptcy you choose, which determines how long the bankruptcy will be part of your life.

Secured debt is any debt tied to collateral -- an object of value. If you fail to pay back a secured debt, the creditor has the legal right to take the collateral and sell it to recover its costs. A home mortgage and a car loan are two very common types of secured debt, but not the only types. Another type of secured debt is a lien, which is a legal claim to a property specifically intended to secure a debt. The IRS may put a tax lien on the property of someone who has unpaid taxes; a construction company may put a mechanic's lien on the client's property to ensure that it gets paid.

Unsecured debt is basically every other kind of debt -- anything without collateral. If you fail to pay this kind of debt back, the lender can't touch your property, so it generally must go after your credit rating. Credit card debt and medical debt -- both very common reasons to declare bankruptcy -- are both unsecured debt.

Which type of debt you have determines which type of bankruptcy is best for you. Chapter 7 bankruptcy is best for individuals and married couples who have a lot of unsecured debt. Chapter 7 is called liquidation because you essentially collect all of your assets that are not protected -- sometimes including home equity -- then sell them and pay your creditors with the proceeds. This is a relatively short process. However, it's not available to everyone -- there's a "means test" that you must pass. Essentially, Californians pass the means test for Chapter 7 if their income over the past six months was below California's median income, which was $60,032 for a two-person household in 2006.

If your income is above the median for your family's size, you'll have to do more complicated tests, but you will probably end up in Chapter 13 bankruptcy. Chapter 13 is a "reorganization," in which you pay off your debts over three to five years under court supervision. It's considered better for people who have problems with secured debt, especially mortgage debt, because it allows them to keep the equity they've already built in their homes. If you're behind in your mortgage and you're determined not to let the home go into foreclosure, you may want to consider Chapter 13 bankruptcy. The big drawback, of course, is that Chapter 13 filers spend three to five years tied to a repayment plan.

Much more goes into deciding which type of bankruptcy is right for you. Because bankruptcy law is complicated and declaring bankruptcy harms your credit for seven years, experts strongly suggest that you speak with a bankruptcy lawyer before you file. The Southern California bankruptcy attorneys at Howard Law offer free consultations -- meetings at which we learn about potential clients' situations and help them understand their options. To set one up for your family, you can call us at 1-800-872-5925 or contact us online.