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When you file for Missouri bankruptcy it is important to know the difference between secured and unsecured debts. These types of consumer debt are treated very differently during a Missouri bankruptcy and your decision to file for Chapter 7 or Chapter 13 bankruptcy could depend solely on how your debts are classified. As well, creditors holding secured debt have different rights when it comes to repayment and priority in a Missouri bankruptcy.
What Is Secured Debt in a Missouri Bankruptcy?
Every secured debt can be tied to a specific piece of property. The most common example is real estate. A mortgage is always a secured debt. When the bank or lender offers a mortgage, it is explicitly for the purchase of a specific piece of property. The amount of the mortgage is tied to the value of that property.
In the event of late or non-payment on secured debt, the creditor can become whole or collect the debt by taking the property. And this concept doesn’t just apply to real estate. Car loans are another common example of secured debt.
What is Unsecured Debt in a Missouri Bankruptcy?
In contrast, unsecured debt is money owed to a lender or other party that can’t be tied to specific property or asset. In these cases, the creditor can’t take explicit property as repayment of an outstanding obligation. It is far more difficult to collect an unsecured debt.
By far, the most frequent type of unsecured debt is credit card debt. You may have purchased certain property or experiences on your credit card, but the card company can’t point to your hair dryer or flight to Ireland as assets tied to this debt. Another common type of unsecured debt is damages from a personal injury or other lawsuits. Unsecured creditors must hire a debt collector, garnish wages, or file a lien against your assets to compel repayment.
Treatment of Secured and Unsecured Debt in Missouri Bankruptcy
Chapter 7 and Chapter 13 bankruptcy approach secured debt differently. When a Missouri bankruptcy is filed under Chapter 7, your secured debts are discharged at the conclusion of the bankruptcy case, just as are unsecured debts. However, after discharge of a Chapter 7 bankruptcy, the creditor still has the right to retake the property tied to the secured debt. The best example is non-payment of a mortgage. After a Chapter 7 bankruptcy, the bank is still allowed to foreclose on your home.
In a Chapter 13 bankruptcy, secured debt is treated differently. At the start of the Missouri bankruptcy process, the debtor has a choice. The debtor can surrender the property underlying a secured debt and the debt becomes unsecured. Alternatively, the debtor can retain the property and continue making payments.
If a debtor chooses to keep the property connected to secured debt, then payment of that debt becomes part of the Chapter 13 repayment plan. In certain situations, the debtor can also continue to pay the balance of a secured debt outside of bankruptcy.
When to Distinguish Your Debts
As you prepare to file for Missouri bankruptcy, a bankruptcy lawyer will review all aspects of your financial situation. Why? An experienced St. Louis lawyer will need to understand the scope of your debt and identity of your specific creditors to advise on when and what type of bankruptcy to file. As part of this process, your bankruptcy lawyer separates secured from unsecured debts.
The ratio of secured to unsecured debt could greatly inform your lawyer’s advice and strategy for a Missouri bankruptcy. As well, if the amount of your unsecured or secured debts crosses the federal threshold, you are barred from filing for Chapter 13 bankruptcy – a fact that your Missouri lawyer should know immediately.
Therefore, the best time to distinguish your debts is in an initial consultation with your bankruptcy lawyer. At the Ledbetter Law Firm, every initial consultation is free of cost and entirely confidential. This allows a potential client to speak with a knowledgeable lawyer without concern that bankruptcy isn’t the right choice, and those costs will be a waste or worry that his or her financial situation will be disclosed.
To schedule a free initial consultation with the Ledbetter Law Firm, call our St. Louis office at (314) 535-7780.