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What is the difference between a secured claim (or debt) and an unsecured claim (or debt)?


This is a very complicated question, but we only have so much space for an answer. In a nutshell, if a claim is secured, that creditor has a right to take something away from you if you don’t pay them on time. The most common examples of secured claims are home mortgages, car notes, and furniture, appliances and electronics that were bought on time.

Those are what we call "purchase money" secured claims, because the money that was borrowed was used to buy those goods directly. There is also a separate category called "non-purchase money" secured claims. This happens when you use something that you already own as collateral on a new loan. In bankruptcy we can often turn a non-purchase money claim into a general unsecured claim. That can sometimes make a big difference in your case, so be sure to tell us if you have borrowed money and signed a piece of paper listing certain items that you own. (This does not apply to refinancing a home, or to a second mortgage or home equity loan. Those almost always get paid in full, with interest.)

A creditor with a secured claim gets special treatment in bankruptcy. The bankruptcy process puts you in a much better position than you would have been in otherwise, but a secured creditor still has the right to take that property away from you if you don’t pay them. The good news is that you can usually lower the payments, lower the interest rate, and/or reduce the amount that you owe them.

In a Chapter 13 ("wage earner") you have the absolute right to keep secured property, as long as you can make certain payments. (For an example of how the payments might work, see FAQ Will I lose my home? and/or Will I lose all of my things?)

In a Chapter 7 you can often keep certain secured property, but the creditor has to agree to it first. (One other rare option is discussed below. Also remember that we are only talking about secured property now. Over 90% of all debtors get to keep all of their other personal belongings in a Chapter 7, and 99% of Chapter 13 debtors get to keep all of their personal belongings.)

The most common way to keep secured property in a Chapter 7 is by "reaffirmation." Both you and the creditor sign an agreement which essentially says that you agree to keep paying them as if you had never filed bankruptcy, and that if you miss any payments they still have the right to take the property away from you. Again, both sides have to agree on this. You don’t have to do it if you don’t want to, and the creditor can refuse to do it and insist on taking the property away from you. This applies to all types of secured claims, including home mortgages. Most creditors are willing to reaffirm if you are current on the payments, or if you can catch up immediately. The farther behind you are, the less likely they are to agree to it.

The other rare option for keeping secured property is called "redemption" or "redeeming." According to federal bankruptcy law, in a Chapter 7 if the debtor can pay the creditor a lump sum of what the property is worth, regardless of what he actually owes, then he can keep it. For example: let’s say that you have a car that is worth $5,000.00, but you owe $8,000.00 on it. You can pay $5,000.00 to that creditor, keep the car, and walk away from the rest of the debt. Of course, this is rare because most people in bankruptcy can not come up with that kind of money. But you might be able to borrow the money from family or friends, or instead of a car we might be talking about a few hundred dollars worth of furniture, and you might be able to handle that.

If you have an item of secured property that you don’t want to keep, you have the absolute right to give it up in a Chapter 7 case, (or at the beginning of a Chapter 13 case). If you do, that debt is no longer secured; it becomes a general unsecured debt. In a Chapter 7 case any debt that remains after surrendering the property would be erased. In a Chapter 13 case the remaining debt would be thrown into the pool of general unsecured debt, to be paid without interest at whatever rate is set for payment to unsecured creditors, which could be anywhere from zero to 100%, depending on many other factors.

A creditor has an unsecured claim (or "general unsecured" claim) if they have a right to collect money from you, but they don’t have any special rights to any of your property. The most common examples of unsecured debts are medical bills, most credit cards, most personal loans, and in a Chapter 13 case, any debt that exceeds the value of the property. Using the same example from two paragraphs up, in a Chapter 13 case if you have a car that is worth $5,000.00, and you owe a total of $8,000.00 on it, that creditor’s claim would be split into two separate claims. You would make secured payments with interest on only the first $5,000.00. The other $3,000.00 is thrown into the pool of general unsecured debt , along with the medical bills and credit card debts.

In a Chapter 7 case, unsecured debts are almost always completely wiped out. In a Chapter 13 ("wage earner") case, unsecured creditors might be paid 100%, or nothing, or anywhere in between, depending on your particular circumstances. If the case completes successfully, all debts to unsecured creditors are completely wiped out, even if they were paid less than 100%.