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Understanding debt differences during bankruptcy

If you are filing for bankruptcy, you'll need to understand the difference between two major types of debt. These types of debt are treated a bit differently under the bankruptcy laws, and they are called secured and unsecured debt.

Secured debt is any debt that is tied to personal property of some type. With a secured loan, you have put up a piece of property as collateral, which means if you fail to pay the lender, they can take that property. They would then sell the property to pay off what you owe. Common types of secured debt are mortgages and car loans, but you might also have secured debt for recreational vehicles such as boats or ATVs. Some stores let you pay on loans for furniture, televisions or appliances, which might also be considered secured debt, and less commonly, personal loan lenders sometimes require you to put up collateral such as electronics or jewelry.

Unsecured debt isn't tied to collateral. Credit cards and medical debts are two types of such debt. Lenders cannot recoup losses on such debts by repossessing property and selling it. Some unsecured debt, such as tax debt and medical debt, is considered priority and cannot be discharged in a Chapter 7 bankruptcy though it can be included in payment arrangements in a Chapter 13 bankruptcy.

During a Chapter 7 bankruptcy, personal property of certain types are liquidated to pay off debts. Unsecured debt that is not priority is usually paid last, which means credit card companies often receive little to nothing in Chapter 7 bankruptcy unless the individuals have a lot of personal property.

Understanding how your debt type plays a role in your bankruptcy -- and how you can keep or reaffirm certain debts and property -- is important. Working with a Washington lawyer, you can learn these details and decide what is right for your situation.

Source: Money Crashers, "What Is Chapter 7 Bankruptcy – Filing Rules & Means Test," Kira Botkin, accessed May 20, 2016

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