What is the difference between secured and unsecured debt?

Lawyers like to use really fancy words, especially bankruptcy lawyers.  My favorite term is "executory contract" (an unperformed contract) because it's a term which even confuses other lawyers.

When discussing bankruptcy you'll hear the terms "secured" and "unsecured," often in reference to a creditor or debt.  Like most fancy terms, these have simple meanings.

A secured debt is a promise to pay where the creditor holds a lien on some property to ensure payment.  It's usually a home or car, but could be other personal property like a motorcycle or TV.  That creditor is called a secured creditor, and if the creditor is not repaid as promised, the creditor can undertake certain state remedies to take the property and credit the property's value towards the outstanding balance.

An unsecured debt is the opposite of a secured debt.  That is, it's a promise to pay without any liens on property.  This includes things like credit card debt, medical bills, or simple promissory notes.

The reason this is important is because bankruptcy discharges your personal obligation to repay a debt. With only a few exceptions, it does not discharge a lien on property.  This means you have to deal with a secured creditor in one of five different ways, which I'll cover in a later post.

It's important to note that some creditors can become secured.  Creditors like the IRS or State of Michigan often place "tax liens" on personal property or land, which makes their unsecured tax debt a secured debt.   Other creditors can do this as well once they obtain a judgment.

FAQ: Why do you need your fees up front?

Many people ask me why I need my fees paid up front as part of a chapter 7 bankruptcy filing.  The answer is simple: if you owe me money when we file, I'm a creditor and the debt is discharged as part of the bankruptcy.  I cannot legally or ethically attempt to collect a debt in violation of the automatic stay or discharge imposed by the bankruptcy court.

So how do you come up with a lump sum to file a chapter 7?  I understand it is a difficult proposition in nearly every case.  There are a number of possibilities:

• Setup a payment plan with me to pay over a few weeks prior to filing while you gather the documentation and complete the credit counseling;
• Stop paying creditors on property you don't intend to keep and put it towards a bankruptcy;
• Sell personal property you don't need (just be sure to document everything sold and how much you received);
• Family and friends will often assist; I've even been paid by an ex-spouse;
  
  
• In limited circumstances, a chapter 13 filing might be possible.  In a chapter 13, my fee can be partially paid after the filing.
  
  
• Borrowing from a retirement account or insurance policy, although a last resort, is another possibility.

This is another way being proactive about bankruptcy helps.  If you take action early before your wages and savings are garnished, the bankruptcy fees can be one less hurrdle in the way of getting a fresh start.