Federal bankruptcy laws distinguish between secured debts and unsecured debts, and the distinction can make a big difference for Tennessee residents considering petitioning under Chapter 7 or Chapter 13. How a debt is categorized impacts the options the debtor and the court have in disposing of it. The matter is complicated by the possibility that secured debt may become unsecured, or vice versa.
Secured debts are debts that are tied to collateral. Home mortgages and auto loans are among the most common types of secured debt. If a debtor defaults on a secured debt, the creditor may seek to take or retake possession of the collateral. The terms of mortgage foreclosure or asset repossession are outlined in the contracts governing the loan and its collateralization.
Unsecured debts are not collateralized. In most cases a creditor has little recourse if the debtor fails to pay unsecured debt other than to report the default to credit agencies or to file a lawsuit against the debtor. The most common types of unsecured debt in bankruptcy cases are medical and credit card debt. Other loans that are often unsecured include business lines of credit and so-called signature loans. Unpaid telephone or utility bills may also be considered unsecured debts.
Debt may change status under certain circumstances. If a creditor is able to obtain a judgment against a debtor, for example, the creditor can pursue recovery by garnishing wages, putting liens on property or seizing funds from bank accounts.
Individuals who have questions about the categorization of debts or about the bankruptcy process generally may want to talk to a lawyer. A lawyer with experience in bankruptcy law may be able to examine a debtor’s particular circumstances and advise the debtor regarding potential avenues of debt relief.
