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chapter7-debtWhen it comes to thinking about bankruptcy and its effects, the number one issue to consider is what type of debt do you have! Once you can determine what type of debt you have then you can go about the process of determining whether you should file for bankruptcy and if that answer is a “yes” then you could consider which chapter you should file.

The question of which type of debt do you have is relatively straightforward. There are two types of debt in this world:

1. Secured debt

2. Unsecured debt.

Secured Debt

Secured debt is usually a related to a home or a car, less frequently it is related to personal property like jewelry, washing machine, or electronics. If you do not pay the loan back on this type of debt, then the creditor has the ability to either foreclose on your house or repossess your car or other piece of property.

Either way, they have security if you don’t pay the loan back which reduces their risk. For example again with a house, if you stop making payments on your mortgage the bank can seize your house and sell it, using that money to cover your loan. The only way to enter into this type of arrangement is if a person signs a contract that explains that the creditor is entitled to recover the collateral if the debt goes unpaid.

Unsecured Debt

Unsecured debt is debt that is not tied to anything. It is just your promise that you are making to the creditor that the creditor is counting on. This debt usually comes in the form credit card debt, medical debt, and personal loans. Of course, if you fail to live up to your promise of paying back the debt then the creditor can always sue you. Sue you for money. And that is all they can do.

An unsecured creditor cannot sue you and take away your car or your house or other personal property. A chapter 7 bankruptcy eliminates these unsecured debts. We are talking about credit cards, medical debt, personal loans, utility bills, homeowners’ association fees, loans from individuals and the like. For the most part a chapter 7 bankruptcy does not affect secured debt.

So, you keep your house and you keep your car as long as you continue to make the monthly payments.

Qualify to File Chapter 7

A person must qualify to file for a chapter 7. Your income, your family size, and your expenses determine whether you can file under this chapter. Talk to an experienced bankruptcy lawyer to figure out if you qualify for a 7 or if that is the best option for you. I cannot emphasize this enough.

Figuring what type of debt you have is incredibly important. Realizing that you have mostly secured debt in the form of a residential mortgage and very little unsecured debt that you are able to pay back means that filing a chapter 7 bankruptcy case would not help your situation.

What if you don’t qualify (don’t worry most people do qualify) for a chapter 7? There is always a chapter 13. I will write about thirteens in an upcoming post.

Wonder If Chapter 7 Bankruptcy Is Right For You? Contact Me For A Free Consultation.