Before filing for bankruptcy you should know exactly what constitutes secured and unsecured debt, and whether both be discharged by filing for Chapter 13 or Chapter 7 bankruptcy protection? The simple answer is yes to both, but in the case of secured debts the answer becomes more convoluted. Consulting with an experienced bankruptcy attorney who can explain how bankruptcy affects your secured debt is vital before making any decisions about you financial future.
Secured debt is debt backed by collateral, and includes home mortgages, second mortgages, car loans, judgment liens, and tax liens. And while you might expect these items to be discharged after bankruptcy, a qualified bankruptcy lawyer will tell you to proceed with caution. Why? Because the collateral backing your debt is the property of the creditor, who is entitled to assume it if payments are missed.
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If bankruptcy discharges my debts, you may ask, then how is it possible that I still might lose my home or car after the fact? It's simple really. A bankruptcy absolves you of any legal responsibility to pay for your secured or unsecured debt, which means legal action cannot be taken against you to recover the debt in question. What it DOESN'T mean is that a secured creditor cannot take back their collateral. They can, and in most cases they will.
In the case of secured debts legal protection does not equal asset protection. If you are behind on your mortgage and are filing for bankruptcy, the mortgage owner can ask a bankruptcy court for permission to foreclose on your home either during or after the bankruptcy proceedings. Even so, it is rarely true that one might have to sell their home and move.
It's important to know that debtors almost always have the option to reaffirm secured debts. By reaffirming a secured debt, the debtor agrees to continue making payments on the secured loan during the bankruptcy and also after the bankruptcy case is closed.
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