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Classification of debt can alter what Chapter 7 can discharge

Chapter 7 is an important form of personal bankruptcy. It permits individuals to discharge some of their debts through the process of liquidation. Whether a debt can be discharged through Chapter 7 bankruptcy can depend on its classification as secured or unsecured.

This informational post will discuss what it means for debts to have different classifications. Readers should not attempt to use the contents of this post as legal advice or to predict the outcomes of their individual bankruptcy proceedings. They can, however, use the contents of this post as a starting point to learn more about bankruptcy before they take their questions to their trusted Indianapolis-based bankruptcy lawyers.

What is a secured debt?

A secured debt is a debt that has collateral attached to it. For example, when a person gets a new car, they may take out a loan to finance it. The money they owe to the lender is secured because the loan is attached to a tangible piece of property – the car. If the individual defaulted on their car loan, the lender could repossess the vehicle to make up for the default of the borrower.

What is an unsecured debt?

Unsecured debts do not have collateral attached to them. Credit card debt is an example of an unsecured debt because a credit card company cannot take the property or items a person purchased on credit when the individual fails to make complete payments on their credit card balance. Unsecured debt is often dischargeable in Chapter 7 bankruptcy.

Liquidation and discharging debts in Chapter 7 bankruptcy

In Chapter 7 bankruptcy, an individual liquidates or sells their property for money to use to repay their creditors. However, secured creditors may attempt to take back the property they have attached to their loans in lieu of receiving money for the balance of the loans. This means that an individual may lose their vehicle, home, or other asset securing a loan when they go through the bankruptcy process.

Debtors should know, though, that it is sometimes possible to negotiate agreements with secured creditors to keep property attached to secured loans. This is not always possible, and individuals can discuss this option with their trusted bankruptcy lawyers.

Not all debts are the same. Some are secured, and others are unsecured. There are even other classifications of debts that can impact how an individual is able to work through bankruptcy. In the end, though, no debtor must face bankruptcy on their own. They can seek the representation of a bankruptcy attorney in their community.