Secured debt. A secured debt is backed up by property -- like your home or a car -- which is also known as "collateral." The creditor can take back the collateral if you don't repay the debt.
Secured debt can be voluntary -- for example, when you get a mortgage to buy real estate or a loan to buy a car. It can also be involuntary -- say, if the government puts a lien on your property for back taxes.
Unsecured debt. Unsecured debt isn't backed up by collateral. Lenders give you credit without "security," relying on your credit history and your promise to repay. Unsecured debt can include everything from your credit cards to your gym membership, your medical bills to a loan from a friend.
In bankruptcy, unsecured debt is divided into priority and non-priority claims. If there's any money available to pay your creditors, priority claims come first. Non-priority unsecured debts are rarely paid in bankruptcy.
Common priority unsecured debts include:
- legal fees related to the bankruptcy filing
- child support and alimony
- federal or state income taxes
- a certain amount of wages and benefits owed to employees, and
- claims against you for operating a vehicle under the influence of alcohol or drugs.
To learn more, see our articles on How to File for Bankruptcy.
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To qualify for Chapter 7 bankruptcy, you must pass the means test, which compares your household income to the median income in your state for a household your size.
The law does not require to have a lawyer, and if your case is simple and you have few assets, you can successfully file a Chapter 7 bankruptcy yourself. Chapter 13? Not so much. And if you have property to lose, or you're not great with details, getting a lawyers help can be a good idea, no matter what kind of bankruptcy you're filing. Also a lawyer may find ways to help that you haven't' thought of
When you file, you'll be asked by the court to decide what you want to do about property you've pledged as collateral, and then you have 45 days to act on it. Your options include surrendering the property, "redeeming" the property by essentially buying it outright at it's current (reduced) market value, or "reaffirming" the debt via a contractual agreement to retain your personal liability and keep making payments, or in some cases, "ride through" - that is, keep making payments on the secured debt even though your personal liability has been wiped out.