How Different Types Of Debt Are Treated During Bankruptcy
Not all debts are the same. Different types of debt have varying tax implications, how they affect your credit score, and each type of debt is treated differently when filing for bankruptcy.
When taking on debt, there are two important categories to keep in mind – secured and unsecured debt.
What Is Secured Debt?
Secured debt is any debt with an asset or item of value that stands as collateral or security for the debt. If you fail to pay the debt, the item can be sold to recover the money that is owed to the lender or creditor.
Types of secured debt or loans can include:
- A mortgage or home finance where the house or property stands as collateral for the debt.
- Car finance where the vehicle stands as collateral for the debt.
These types of debt often have longer terms (repayment periods) and are for larger purchases. Mortgages generally have terms between 5 and 30 years. Some mortgage lenders will offer longer terms depending on a number of different factors.
Secured loans also commonly have lower interest rates than other debt with shorter terms. Mortgages commonly have interest rates that range from 3% to 6%. Car finance typically charges interest between 1% and 10%. However, some car finance providers will offer 0% loans for those with good credit.
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What Is Unsecured Debt?
Unsecured debt has no collateral, so there is no security for the lender should you fail to repay the debt. These loans have shorter terms and higher interest rates than secured debt. Types of unsecured debt include:
- Credit cards, store credit, or other types of revolving credit don’t have a set repayment period. In other words, the entire amount isn’t due at the end of the term, which is usually 30 days, 60 days, 90 days, etc., depending on the terms of the debt.
- Personal loans generally don’t require a reason for the loan and typically have a term of between 6 months and two years.
- Payday loans have the shortest term and usually need to be repaid in full at the end of the month or within 30 days. These loans also have the highest interest rate and are most likely to result in a debt trap.
- Student loans are considered good debt and generally have interest rates between 4% and 6%.
- Medical debt can result from either having no medical insurance or insufficient cover. This is not traditional debt but common and accrues interest as long as the medical bill goes unpaid.
So How Are These Different Types Of Debt Treated In Bankruptcy?
During bankruptcy, assets or items of value are sold, and the proceeds are used to pay off debt. There are three categories for how debt is paid off depending on the type of payment plant:
- Priority debt cannot be discharged and is paid first from the proceeds of asset sales. These include debts like taxes.
- Secured debt will be paid next from the amount that remains from the proceeds of asset sales after priority debt has been covered. Any secured debt that cannot be repaid from the proceeds may be discharged but not always.
- Unsecured debt is last in line to get paid from the proceeds. Most often, these are the types of debts that are discharged during bankruptcy.
A debt that has been discharged has been entirely erased. The holders of this debt (your creditors) will need to wipe the debt off their books and can no longer pursue it.
For more information on and assistance with the different types of debt and how they are treated in the different types of bankruptcy, contact W. Ron Adams Law.
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