Unsecured Versus Secured Debt in Chapter 7 Bankruptcy

 Posted on February 07, 2025 in Chapter 7 Bankruptcy

Two of the most used terms in bankruptcy are secured debt and unsecured debt. These types of debts are treated differently in Chapter 7 bankruptcy. Understanding what these terms mean and what happens to secured versus unsecured debt in Chapter 7 can give you an idea of what may happen to your debts when you file for Chapter 7 as far as whether they will be discharged or whether your obligations to pay will continue. An experienced Houston, TX bankruptcy attorney can advise you on how your debts are likely to be treated in Chapter 7 bankruptcy.

How Does Chapter 7 Bankruptcy Work?

In Chapter 7 bankruptcy, the bankruptcy trustee will take all your assets that are not exempt (exempt assets usually include your home and car in Texas), sell them, and distribute the proceeds to your creditors. This will discharge or wipe out most of your debts (with some exceptions such as child support and tax debts).

What Is Secured Debt?

Secured debt refers to debt that is backed up by property or assets, called collateral. Outside of bankruptcy, if you default on this type of debt, the creditor can take the property that secures the debt. For example, if you stop paying your home mortgage, the bank can repossess the home that serves as the collateral for the mortgage debt.

What Is Unsecured Debt?

Unsecured debt is debt that is not backed up by any property or assets. The most common type of unsecured debt is credit card debt. Medical bills, personal loans, and legal judgments against you also fall under this category.

What Happens to Your Unsecured Versus Secured Debts in Bankruptcy?

Unsecured Debt

Chapter 7 bankruptcy discharges unsecured debts. Because unsecured debt is not backed up by collateral, your creditors have no property to take to pay back the debt. Instead, the proceeds from the sale of your nonexempt assets will be paid to the unsecured creditors to satisfy these debts.

Secured Debt

In Chapter 7 bankruptcy, your responsibility to pay for secured debts can usually be discharged but the lender will be able to take the property serving as collateral for the debt. You have three options to deal with your secured debts in bankruptcy:

• Redeem the property by paying the creditor the fair market value of the property, and you get to keep the property.

• Give back the property to the lender.

• Keep the property and continue making on-time payments.

Contact a Montgomery County, TX Chapter 7 Bankruptcy Attorney

The decision to file for bankruptcy is not an easy one, but it can help you get your financial life on track. An experienced Waller County, TX bankruptcy attorney can explain the process to you, help you file for bankruptcy, and represent you throughout the process. At The Fealy Law Firm, PC, attorney Vicky Fealy helps good people through hard times. Call the law firm at 713-526-5220 for a complimentary consultation to see whether Chapter 7 bankruptcy is the right option for you.