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A judgment lien turns an unsecured debt into one secured by a lien on your home. Bankruptcy can undo that, and write off the debt.

Very Different Treatment of Unsecured Debts and Secured Debts

A couple blog posts ago we discussed how differently unsecured and secured debts are treated in bankruptcy.

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A secured debt effectively turns into an unsecured debt if you surrender the collateral, which may make sense to do more than you think.


“General Unsecured” Debts and Secured Debts

Our last blog posts described the huge difference in the treatment of “general unsecured” and secured debts in bankruptcy. “General unsecured” debts are discharged—legally and permanently written off. But with secured debts, the lien that the creditor has in something you own is not usually affected in bankruptcy. The lien continues in effect, giving the creditor continued rights to your asset after the bankruptcy case is completed, including usually the right to repossess or foreclose. So if you want to keep that asset, usually you have to pay the debt.

However, last time we listed 3 situations in which bankruptcy effectively turns a secured debt into an unsecured one. We focus on the first of those situations today.

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A secured debt can be handled like an unsecured debt if you surrender the collateral, “avoid” a judgment lien, or just keep the collateral.

The “Discharge” of “General Unsecured” Debts

In our last few blog posts we have shown how “general unsecured” debts are handled under Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.” Most of the time those debts are simply discharged—legally written off—under Chapter 7. They are also discharged at the successful completion of a Chapter 13 case, usually but not always after partial payment.

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Chapter 7 strengthens your hand with your secured debts. But Chapter 13 can be much stronger. Starting with a more potent “automatic stay.”

The last blog post explained how filing a Chapter 7 “straight bankruptcy” can:

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Stop secured creditors from taking your property, unsecured debts from turning into secured ones. Keep or surrender collateral as you wish.

Our last blog post a couple days was about secured debts. We explained that for a debt to be legally secured against something you own the creditor must go through certain steps to accomplish that, or else it won’t be secured. We showed how you could contractually enter into a secured debt voluntarily. But our blog post also showed that a creditor can turn its unsecured debt into a secured one by suing you or using other means of involuntarily imposing a lien on your possessions and/or real estate.

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210-342-3400

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