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What You Need to Know Regarding Secured Vs. Unsecured Debts

unsecured debts

Jan,12,2018

By:Mike Cibik

 

What You Need to Know Regarding Secured Vs. Unsecured Debts

 

Debt; one of the most dreaded words a person has to deal with in his or her lifetime. Being cash-strapped in an economy such as ours is not uncommon.

 

It is important to be aware of the two kinds of debts –secured and unsecured debts. Secured debts have some collateral involved with it. It means that you have put something on the line in the promise of paying back your debt.

 

Whereas unsecured debts do not legally attach you to anything you own. That is, you still have to repay the money, but the lenders do not have immediate rights over your property.

 

They have no security. If you fail to repay your debt, the lender cannot repossess or seize anything you own. While filing for bankruptcy, it is easier to deal with unsecured debts because they are more often than not legally written off.

 

But it must be kept in mind that sometimes an unsecured debt can turn into a secured one. If left unpaid, an unsecured debt can be turned into a secure debt. The creditor will try various means to get you to pay your dues. He may even try to appoint a debt collector on board to try and retrieve his money. When all his efforts fail, he will eventually file a case against you and seek the court’s permission to collect what you owe him. The court can grant him permission to:

  • Seize one of your assets.
  • Put a lien on your assets making it impossible for you to borrow against it or sell it without paying your debt.
  • Garnish your wages, by seizing a portion of your salary each pay period till his debt has been covered. (Depending on your state’s laws)

 

If you fail to pay income taxes, the IRS can record a tax lien against your personal property, without having to sue you.  In such cases, filing for bankruptcy can stop a lawsuit from progressing. It can stop the creditors from turning an unsecured debt into a secure one.

 

Alternately, sometimes a secured debt can turn into an unsecured debt. Secured debts will be treated as unsecured debts once the collection of the collateral damage has been completed. After the creditor repossesses or sells off the security gained by him, any remaining debt would turn into unsecured debt.

 

A secured debt can also be turned into unsecured in many other ways. If the security is lost or damaged, the creditor would be left with nothing to seize or take over. In case of an alternate secured creditor takes over the security claiming prior rights, the other creditor might no longer have claims over his dues.

 

There are two kinds of unsecured debts namely, priority debts and general unsecured debts.

 

  • Priority debts are those that are given special consideration by the law. Income taxes or child support that has not been paid come under priority debts. These have priority over other unsecured debts and they are the first things that need to be paid in full in case of bankruptcy.

 

  • General Unsecured debts are all the other debts which do not come under the category or priority debts. Medical bills, credit card bills, personal debts, retail accounts, unpaid utilities are some of the examples of general unsecured debts. An unsecured debt that is not a priority is referred to as general unsecured debt.

 

If all your unsecured bills are general and not priority then you should file a Chapter 7 bankruptcy case because it writes off those debts within a span of 3 to 4 months. You might end up not having to pay anything on those debts.

 

On the other hand, Chapter 13 or the adjustment of debts case would have you pay some part of your general unsecured debts. This type also takes longer since the release of the remaining unpaid amount will not be allowed until the end of a 3-5 year payment plan.

 

It is also a lot riskier because, in case you do not successfully complete the Chapter 13 case, the remaining part of the general unsecured debt will be written off and you will still continue to owe them that amount. Chapter 13 is a favorable option if you have a priority debt that is quite large since it has better tools for dealing with such kinds of debts.

 

Cibik & Cataldo P.C. have provided debt-relief services for 35 years. We welcome an opportunity to hear your case and offer our legal expertise. If you’re worried about your debts, do not hesitate to contact us to get your questions answered at 215-735-1060.

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