What is Unsecured Debt?

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Written by Andrea Wimmer, Esq.  
Updated January 22, 2020

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Unsecured debt is money you owe to a creditor that is not connected to any specific piece of property. Credit card debt, unsecured loans, and medical bills are examples of unsecured debt. If you stop making your monthly payments on this type of debt, the only recourse for the creditor (other than to call and send you notices in the mail) is to file a lawsuit against you. Unsecured creditors and their debt collectors can't do anything else, including starting a wage garnishment, until and unless a court enters a judgment against you. By contrast, with a secured debt the bank has a continued property interest in the item you purchased, whether that’s a car or real estate. That's why if you default on an auto loan, mortgage, or home equity line of credit, your property can be repossessed or foreclosed. 

Common types of unsecured debt are

  • Credit card debt

  • Medical bills

  • Old utility bills

  • Old rent and lease payments

  • Personal loans

  • Payday Advance loans

  • Old cell phone bills

  • Deficiency on a car loan after a repossession

  • Student loans

  • Most tax debts

Are there other differences between secured and unsecured debt?

Yes, there are a number of differences between secured and unsecured debt, though most of them are only really important when you first get the loan. Unsecured debt tends to come with higher interest rates and, depending on a person’s credit history and creditworthiness, may be much harder to get than secured debts. Folks with a high credit score are able to get a lower interest rate than most even on their unsecured debts. Others may not be able to qualify for a credit card at all and are left with secured credit card options. 

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What are my debt relief options if I have too much unsecured debt? 

If you’re in over your head with too much unsecured debt, you have several options. Keep in mind, not every debt relief option out there is available - or right - for everyone.

Debt settlement

Debt settlement is easier with unsecured debt than with secured debt. But, it typically requires an ability to make lump-sum payments to creditors in exchange for a lower payoff amount. It’s also risky because you’re dealing with each creditor individually, and if not all of them are on board for a settlement, they can make settling with other creditors much harder by getting a judgment against you then garnishing your wages. 

Debt consolidation

Debt consolidation makes great sense if you have the ability to pay off your debts, just not with the amount of interest you’re adding to the balance every month. In a consolidation, you combine all of your debts, often by taking out a new loan, and pay them off at a lower interest rate. If your credit score has already been impacted, getting favorable terms for such a loan may be difficult. In that case, a debt management plan - another form of debt consolidation - may work instead. 

Credit counseling

Credit counseling will give you the opportunity to get a comprehensive overview of your situation and your options. If you don’t know that to do, signing up for a credit counseling session with an accredited nonprofit provider in your area is the best place to start! 

Bankruptcy

Bankruptcy is the ultimate form of debt relief. It’s designed to give the honest but unfortunate debtor a way to hit the reset button and start fresh, unencumbered by unsecured debts. The remainder of this article will examine how bankruptcy can help you eliminate your unsecured debts. 

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How does bankruptcy get rid of unsecured debt? 

Eliminating unsecured debt is one of the primary benefits individuals receive from a bankruptcy filing. Once the filer meets all legal requirements, they will be granted a discharge. This is an order from the U.S. Bankruptcy Court telling your creditors that they are not allowed to try and collect your debt from you ever again. Almost all types of unsecured debts are eliminated when the discharge is entered. In other words, you can eliminate most, if not all, of your unsecured debts by filing a bankruptcy case.  

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How is unsecured debt treated in Chapter 7 bankruptcy?

All of your debts must be listed in your bankruptcy forms. This is true even for debts that can’t be discharged. A typical Chapter 7 bankruptcy case takes four to six months to complete. As soon as the case is filed, you can stop all payments on your unsecured debts. If you were already behind on your monthly payments, the automatic stay protects you from whatever any collection agency may have wanted to do next. Creditors cannot try to collect unsecured debt as soon as the case has been filed. They cannot call you, send letters, or file lawsuits to collect unsecured debt that is discharged.

In more than 90% of all Chapter 7 bankruptcies, unsecured creditors receive $0 on the debt owed to them. That’s because the bankruptcy trustee handling the Chapter 7 bankruptcy has reviewed the filer’s situation and determined that there is nothing that can be sold to pay unsecured creditors. Only property that is not protected by an exemption can be used to pay unsecured creditors. If there is nothing, they get nothing and, once the discharge is entered, are forever prohibited from asking you for payment. 

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Unsecured debt that can’t be discharged in bankruptcy

Not all unsecured debts can be discharged in bankruptcy. However, just because they can’t be discharged doesn’t mean they don’t have to be listed on your bankruptcy forms. Some of the most common non-dischargeable debts are: 

Student loans

Student loans can’t be discharged in bankruptcy unless the filer can show the court, through a separate adversary proceeding, that it would be an undue hardship for them not to. This “undue hardship” standard has been very hard to meet and very few people are able to successfully discharge their student loans in bankruptcy. 

Most debtors have to pay student loans. When you get rid of the rest of your unsecured debt, student loan payments may not be as difficult to make. You may also qualify for other student loan relief. The government has several options available for people who can’t pay their student loans.

Personal income taxes

Only tax debts that are more than three years old and meet all of the requirements can be eliminated in a Chapter 7 bankruptcy. The discharge analysis can get very complicated very quickly, so if you have a lot of tax debts it’s best to speak with a bankruptcy attorney before filing your case. Otherwise, you risk not being able to eliminate a debt that you could have discharged if you had waited a few months before filing.   

Domestic support obligations

Domestic support obligations include alimony and child support. You can’t get rid of alimony or child support obligations by filing a bankruptcy case. Filing bankruptcy does not forgive unpaid alimony or child support.

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How is unsecured debt treated in Chapter 13 bankruptcy?

In a Chapter 13 case, you file a repayment plan. The repayment plan proposes to reorganize your debts into an affordable monthly payment.

Unsecured debt is included in your Chapter 13 plan. Unsecured creditors receive a payment from the Chapter 13 trustee. The payment is a percentage of their unsecured debt. General unsecured creditors rarely receive payment for all the unsecured debt you owe. 

However, you can still eliminate certain non-dischargeable debts by paying them off through your Chapter 13 bankruptcy plan. Both tax debts and domestic support obligations are considered priority debts, which allows you to treat them differently from all other unsecured debts and pay them off. 

When you complete your Chapter 13 plan, the remaining balances owed to unsecured creditors are discharged, just like in a Chapter 7. Since you’ve paid off all non-dischargeable priority debts, you’ll essentially be debt free even though only part of your unsecured debt was discharged. 

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Filing bankruptcy on your own

If you’re struggling to make ends meet you may wonder how you can ever be able to afford bankruptcy. The good news is, you don’t have to have a lawyer to file for bankruptcy protection. If you are ready to get rid of your unsecured debt, Upsolve can help. You can get back on the road to financial well-being. People file bankruptcy for many reasons. Unemployment, loss of a spouse, and medical debts are some common examples. It doesn’t matter why you can’t pay your bills, if you’re in over your head, Chapter 7 bankruptcy can give you the relief you need.  

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