When it comes to having certain debts discharged in bankruptcy, many people assume that all loans are handled the same. In fact, the opposite is quite true. There are big differences between types of loans and how they are managed in bankruptcy. Even certain types of loans are not handled the same depending on who the lender is, which is why getting to know how bankruptcy is applied to loans can be very beneficial.

Unsecured Loans

Many personal loans and most credit cards are considered unsecured loans. The term €unsecured€ refers to the fact that the loan is not secured against anything as collateral. In other words, the loan is given in return for the promise to repay the debt. Since there isn't anything secured as collateral against the loan, these debts can be easily written off by the creditor or managed in bankruptcy.

The majority of the debts handled in a bankruptcy case are unsecured debts. These debts are the main focus of a Chapter 7 bankruptcy and usually result in being written off by the creditor or satisfied in some other way. Unsecured debts are not usually the main focus of a Chapter 13 repayment plan, but can be rolled into the plan if the court deems necessary.

Secured Loans

The term €secured€ refers to the fact that the debt is secured to the loan by a particular asset. Mortgages, car loans and title loans are all examples of secured loans. When a borrower defaults on a secured loan, the creditor is legally eligible to reclaim the asset and liquidate it in effort to satisfy the debt owed. The legally secured status makes secured debts more difficult to manage in the average bankruptcy case.

Secured debts are mostly handled through Chapter 13 bankruptcies because the debt must be repaid in order for the borrower to maintain possession. For example, it is not possible to have mortgage debts written off or completely eliminated in a Chapter 7 bankruptcy. However, a borrower would be able to stop a foreclosure and keep a house if they repaid their mortgage debt through a Chapter 13 repayment plan. There are some exceptions to this rule. Second mortgages or home equity loans, although secured, may be eligible to be eliminated through Chapter 7 as long as the remaining mortgage debts on the original loan are repaid.

Payday and title loans are usually secured loans, but are more difficult to manage in bankruptcy. The reason is that a payday or title loan typically uses the deed to a house or car as the collateral against the loan. This essentially creates two different lenders who maintain a legal right to liquidate the asset if the borrower defaults on one of the loans. Therefore, if a person enters bankruptcy with their car loan lender and a title company lender both having legal claim over the car; the bankruptcy process must then determine which lender is eligible for asset liquidation or entitled to a portion of the profits.