Unguaranteed Loans
Numerous personal loans and the majority of credit cards are unsecured loans. The expression """"unsecured"""" refers to the absence of collateral for the loan. In other words, the loan is granted in exchange for a promise to pay it back. Since there is no collateral for the loan, the creditor or the debtor can simply cancel or manage these debts.
The preponderance of debts in a bankruptcy proceeding are unsecured debts. These obligations are the primary focus of a Chapter 7 bankruptcy and are typically discharged or otherwise satisfied by the creditor. Generally, unsecured obligations are not the primary focus of a Chapter 13 repayment plan, but they can be included if the court deems it necessary.
Guaranteed Loans
The term """"secured"""" refers to the reality that the loan is secured by a specific asset. Mortgages, auto loans, and title loans all qualify as secured loans. When a borrower defaults on a secured loan, the creditor is permitted by law to repossess the collateral and sell it to satisfy the debt. The legally secured status makes it more difficult to manage secured obligations in the typical bankruptcy case.
Because secured debts must be repaid in order for the borrower to retain possession, Chapter 13 bankruptcies are typically used to address them. In Chapter 7 bankruptcy, it is not possible to discharge or completely eliminate mortgage debts, for instance. However, if the borrower repaid their mortgage debt through a Chapter 13 repayment plan, they would be able to avoid foreclosure and retain their home. There are exceptions to this general norm. Despite being secured, second mortgages and home equity loans may be eligible for elimination under Chapter 7 as long as the remaining mortgage obligations on the original loan are repaid.
Typically, payday and title loans are secured loans, but they are more challenging to manage in bankruptcy. The reason for this is because a payday loan or title loan typically utilizes the title to a house or car as collateral. This effectively establishes two distinct lenders who retain the legal right to liquidate the asset in the event that the borrower defaults on one of the loans. Consequently, if a person declares bankruptcy with a car loan lender and a title company lender who both have legal claim over the vehicle, the bankruptcy process must determine which lender is eligible for asset liquidation or entitled to a portion of the profits.
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