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What is the difference between secured and unsecured debt?

It seems like every legal proceeding requires the parties to learn a new language. For example, in bankruptcy law, there is exempt and nonexempt property, secured and unsecured debt, bankruptcy trustee and other phrases that you do not run into every day.

Yet, that is no reason to fear bankruptcy. An experienced Texas bankruptcy lawyer can explain the legal concepts to you and help you on the road to financial recovery.

One of the questions clients often have during Chapter 7 bankruptcy or Chapter 13 bankruptcy is: What is the difference between secured and unsecured debt? This difference matters because certain debts can be discharged during bankruptcy while others cannot.

What is secured debt?

A secured debt is a debt that includes collateral. For example, a mortgage is a secured debt because the bank is allowed to seize your home (the "collateral") if you default on the debt. Car loans are also secured debt.

What is unsecured debt?

Collateral is not attached to unsecured debt. Generally, creditors charge higher interest rates on unsecured debt because there is a higher risk to the creditor. Examples of unsecured debt include credit cards and medical debts.

Chapter 7 bankruptcy

Most unsecured debts are dischargeable during Chapter 7 bankruptcy (exceptions include student loans and child support). Secured debts, on the other hand, are non-dischargeable. This means they cannot be released during bankruptcy. However, debtors can exempt a portion of their secured debts, often including a home and a car, from liquidation during bankruptcy.

Chapter 13 bankruptcy

In Chapter 13 bankruptcy, debtors must repay secured creditors through a Chapter 13 repayment plan. They are allowed to keep the secured property that is part of the repayment plan. If you are able to stick to your Chapter 13 repayment plan, most of your unsecured debts can be discharged at the end of the bankruptcy plan.

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