Bankruptcy debt can be secured or unsecured, each subject to different treatment under the Bankruptcy Code. Debt that is secured with collateral of the ‘right to setoff’ or a ‘lien on property’ ensures the repayment of the obligation if a borrower declares bankruptcy.
Can an automatic stay protect a home used as collateral for a loan?
Many who are considering bankruptcy want to know if they can protect property used as collateral, such as their home (think HELOC) or automobile. Although a creditor’s right to enforce its lien is subject to an automatic stay in bankruptcy, a creditor may seek relief from the automatic stay to repossess property to satisfy the debt.
However, under Chapter 7, a debtor does have an option to reaffirm the debt which would require the resumption of payments. In a Chapter 11 or 13, it is possible for a debtor to retain collateral as part of the repayment plan, however, the creditor is entitled to not only regular payments as part of the 3 to 5 year plan, but also full payment of the secured claim, so no discharge of secured debt is available at the end of a chapter 11 or 13 repayment plan.
How is unsecured debt handled in a bankruptcy?
Any debt that is not secured with collateral is considered unsecured debt, which means that a creditor does not hold a lien on property or a right to setoff. The debt will instead be satisfied through the liquidation of a debtor’s nonexempt property.
Because there may be a number of creditors owed, there is a pecking order of sorts when deciding which debts will be paid first, which is important because there may be insufficient assets to satisfy all the debt. Therefore, unsecured debt is categorized as priority or general, with the payment of priority unsecured claims such as child support or spousal maintenance having priority over general debts such as credit cards or medical bills. After priority, then general unsecured claims are paid from available proceeds of non exempt property, the remaining unsecured debt is discharged.
If you are considering bankruptcy protection and have questions, it is important to work with an experienced illinois bankruptcy lawyer to make sure all your questions are answered and all your options are discussed before filing. Contact the Peoria bankruptcy law offices of Charles E. Covey at 309-674-8125 for a free consultation on whether bankruptcy protection is a good strategy for your particular financial situation.