Property Liquidation and Secured Debt

The two main types of personal bankruptcy are Chapter 13 and Chapter 7. Both have to be filed in a federal bankruptcy court. Chapter 13 allows you to keep your property, such as your mortgaged house, that you would otherwise lose through the bankruptcy process. The court approves a repayment plan that gives you three to five years to pay off your debts (as opposed to surrendering property to satisfy them). Once the plan is fulfilled and all payments are made, all debts filed under the Chapter 13 are discharged.

Chapter 7, also called straight bankruptcy, means that all assets that are not exempt are liquidated. Because of a few exemptions, you may be allowed to keep a car, work-related tools, and basic household furniture. Your property might be sold by a court-appointed trustee, or simply given to your creditors.

In October 2005, Congress made several changes to bankruptcy law, giving consumers more incentive to opt for Chapter 13 over Chapter 7. Both types can eliminate unsecured debt and halt foreclosures, repossessions, wage garnishments, the loss of utilities, and harassing debt collectors. Both also provide exemptions that allow you to keep certain assets. Also, if you don't have a viable plan to erase your debt under a Chapter 13, bankruptcy doesn't allow you to keep an asset if a creditor has an unpaid mortgage or security lien on it.

A secured debt is simply a debt that has collateral; if the debt is unpaid, your creditor can repossess the collateral. These are the two kinds of secured debts:

• Consensual: A consensual secured debt is one which you agreed to collateralize with some sort of property or asset. The best example is car notes (they usually have a lien on the automobile) and mortgages (they usually have a lien on the house).
• Nonconsensual: Sometimes a creditor can get a lien on your property or assets without your consent. In theory, this lien allows the creditor to force sale of the property to receive payment on a debt.

• Judicial: Can be imposed if you are sued and your opponent wins the case. The creditor records the lien with the county or state, creating a judicial lien.
• Statutory: This is an automatic lien created by law. One example is a homeowners association that has an automatic lien against your property if you become delinquent on your dues.
• Tax: All levels of government can impose liens on your property for delinquent taxes.

An unsecured debt is simply a debt without collateral, such as a credit card debt. Creditors are not entitled to repossess or seize property if you don't repay an unsecured debt. Other kinds of unsecured debts include department store charge cards, medical bills, loans from individuals, student loans, or union dues.

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