Define Unsecured Bankruptcy

In a personal bankruptcy case, debtors receive a discharge of a portion of their debts. The bankruptcy code distinguishes between secured and unsecured debt. Only unsecured debt can be discharged in a bankruptcy case. Debtors must work with their creditors regarding secured debts. Out of all possible unsecured debts, certain debts cannot be discharged.

Secured Debt

Collateral makes the difference between secured and unsecured debt. Secured debt is a loan backed by collateral. A creditor lends money to a debtor and takes a security interest in the debtors property or collateral. Using the debtors property as collateral ensures that the lender will get paid. The debtors knowledge that he will lose his property if he defaults on payments prompts him to make his regular payments. Either way, the creditor will be paid by taking the property or receiving the debtors agreed-upon payments. Common types of secured debt are mortgages and car loans.

Unsecured Debt

A contract between the debtor and the creditor creates unsecured debt. The contract involves no collateral. The contract merely contains the debtors promise to repay the money borrowed, according to the contracts terms. If the debtor defaults on the loan, the creditor has no property to take to ensure payment. The creditor will have to resort to collection tactics to induce the debtor to make good on the debt. The most common types of unsecured debt are credit card debt, medical bills and personal loans.

Chapter 7

In a Chapter 7 bankruptcy, a trustee administers the debtors case. When creating the bankruptcy code, legislators intended that a debtor would repay at least a portion of his debts. Because the debtor has virtually no money with which to pay creditors, the object was to raise money to pay creditors by selling the debtors property. The trustee identifies the debtors exempt property and the debtors non-exempt property.

Reaffirmation

The bankruptcy court cannot discharge secured debts, so the debtor must decide what she wants to do with her secured debts. For example, a debtor owns a car that cannot be exempted from sale. The debtor can either pay for the car, or the creditor will take the car. If the debtor wants to keep the car, she will need to work out a deal with the car dealership and agree to pay for the car under the original contract terms. The debtor would be reaffirming the debt.

Discharge

After the trustee has sold all property that is not exempt from being sold, the debtor receives a discharge of unsecured debts. Wait. Not so fast. All of the debtors unsecured debts may not be dischargeable in any type of bankruptcy. The legislators who created the bankruptcy code thought that debtors should be held responsible for these debts. Debts for child support and alimony; certain taxes; student loan debt; debts for the willful and malicious injury to another person or to the property of another; debts for death or personal injury the debtor caused while driving under the influence; and debts for certain criminal restitution orders cannot be discharged.