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Understanding Bankruptcy: What To Know About Unsecured Debts

nervous couple looking at their bank statements


By:Mike Cibik


What To Know About Unsecured Debts


Any debt which is not tied to a piece of property or asset such as an automobile, home, property, etc. is unsecured debt. Basically, the creditor would have no “security” linked to the debt. If you don’t pay unsecured debt, your creditor cannot seize or repossess your asset.


Thus, unsecured debts create lesser problems and stress for the consumers as they don’t tend to lose any property or asset if they fail to repay the debt. That’s the most notable difference between secured and unsecured debt.


Unsecured debt also allows you the options of debt-relief including debt consolidation, debt management, and debt settlement. These options help you clear the debts faster for lesser money in most cases.


Types of Unsecured Debts


There are basically two types of unsecured debts: ‘priority’ and ‘general unsecured.’


Debts that are treated as special by the law for several reasons are ‘Priority debts.’ Debts such as unpaid latest income taxes or past-due child support are categorized as “priority” debts.


These debts are treated as special as these must be paid completely in the event of bankruptcy. Priority debts are always put ahead of all the other unsecured debts in bankruptcy and otherwise.


Any other unsecured debts that are not priority are categorized as ‘General unsecured’ debts. These debts are the most unsecured since these don’t even get any priority. Examples of general unsecured debts are:


  • Most medical bills,
  • Most department store charges and credit card bills
  • Personal loans or Student loans
  • Retail accounts,
  • Most payday and internet loans,
  • Telephone, electricity, utility or any other similar bills,
  • Claims against you arising out accidents or other bodily injuries,
  • Any damage occurring from business disputes and contracts
  • Overdrawn checking accounts,
  • Bounced checks,
  • The outstanding debt post the vehicle is repossessed or real estate been foreclosed, and several other kinds.


Usually, the debt which is not secured and is not ‘priority’, it is ‘general unsecured.’ While most debts fall under ‘unsecured’ category, the main exceptions are auto and home loans, which are secured in most cases.


Unsecured Debts in Bankruptcy


Understanding ‘Bankruptcy’ is also important in order to have complete knowledge about unsecured debts. Bankruptcy is defined as the legal status of an entity or a person that fails to repay debts to the creditors. Mostly, bankruptcy is imposed by the court order, usually initiated by the debtor.


Bankruptcy is a common term for a court procedure that helps businesses and consumers liberate them from their debts and repay the creditors. If you are able to prove in the court that you are entitled to bankruptcy, the court will safeguard you throughout the bankruptcy proceeding. Generally, there are two categories of bankruptcies: ‘liquidations’ and ‘reorganizations.’


Among various categories of bankruptcies, Chapter 13 and Chapter 7 proceedings are the most frequent for businesses and individuals. Chapter 13 bankruptcies usually allow you to keep your asset.


You must, however, submit and stick to such a plan that will let you repay your debts within a specific time period. Chapter 13 bankruptcies normally fall under reorganization category. Chapter 7 bankruptcies usually fall under the liquidation category. In these type of bankruptcies, your asset could be sold off for repaying your debts to the creditors.


What Happens If You Fail to Pay the Unsecured Debt?


In case, you fail to repay an unsecured debt, the creditor would first contact you and try to obtain a payment. If you still fail to pay, the creditor may report the delinquent debt to one or all credit reporting agencies, or may also file a court case against you. However, a non-governmental, unsecured creditor is not authorized to seize any of your properties without the court judgment.


Court Judgment in case of Unsecured Debt


In order to get a fair judgment, the creditor must file a case in the state or federal court and serve the debtor with a copy of the complaint. The debtor has the right to submit a response to the complaint and challenge the claim before any judgment can be recorded.’


While a court case against you can leave you devastated, you can always get the debt discharged through bankruptcy or other means of settlement. Contact an experienced lawyer if you ever fall under such circumstances.


For 35 years, The Philadelphia, Pennsylvania debt-relief law firm of Cibik & Cataldo, P.C has provided superior legal services for our clients throughout Pennsylvania. For a free consultation, please give us a call at 215-735-1060.


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