Filing for bankruptcy can be a very trying time for anyone. Those who file usually have suffered a severe financial setback that is typically the result of something such as a divorce or a large medical expense. The whole process is emotional and difficult. What most who go through the process do not understand is how their debts are discharged. This is especially true of loans.
Discharging Unsecured Loans
An unsecured loan is one that is not backed by collateral. Most unsecured loans are “secured” by a signature. These loans include personal loans and credit cards. A personal loan, just like a credit card, is one where the loan is given and, in return, the debtor promises to repay it. The majority of debts in a personal bankruptcy are of the unsecured variety. Since these loans are not backed by anything, they are easy for a creditor to write off.
In a Chapter 7 bankruptcy, these types of personal loans and credit card debts are usually written off by the creditor or satisfied in some other way. If an individual files a Chapter 13 bankruptcy, they are agreeing to repay their debts through a negotiated payment plan. Unsecured debts are normally not the focus of a Chapter 13 bankruptcy, but can be rolled into a payment plan. The discharging of unsecured loans is much simpler than secured loans.
Discharging Secured Loans
Collateral is the key to a secured loan. A mortgage, a car loan, and a title loan are all examples of secured loans. Each of these types of loans is backed by an asset. Should the borrower default on the loan, the creditor can take possession of the asset. These types of debts are a bit more difficult to handle when it comes to a bankruptcy.
Secured loans are more difficult to deal with in a bankruptcy because there are often two different lenders involved. A car title loan, for example, could have been obtained through a company like Florida’s Embassy Title Loans, one of the state’s premier consumer finance companies. However, the car may have been purchased with a loan from a bank. Both would be entitled to possession of the car or any proceeds from a payoff.
Mortgage debts cannot simply be written off. A Chapter 13 bankruptcy can help someone stay in their home by negotiating a payment plan. Some secured loans – such as home equity loans – may be written off, but an individual’s mortgage debt still must be repaid.
It is important for anyone who even thinks about bankruptcy to understand what types of loans can be discharged and how. A person can make a better decision about their financial future with this knowledge.