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How exactly is debt discharged under Chapter 7 bankruptcy?

As we've made abundantly clear on our blog, one of the biggest advantages of filing for Chapter 7 bankruptcy outside of stopping collection efforts is that it can discharge debt, providing the filer with a much-needed fresh financial start.

As appealing as this undoubtedly sounds, questions naturally arise as to how exactly debt is discharged via Chapter 7. In today's post, the first in a series, we'll seek to shed some light on this important topic.

What is secured debt?

As implied by the name, a secured debt is one in which the person borrowing the money provides some sort of asset as collateral for a loan. This means that in the event a person is unable to make the necessary payments, the lender has the option of seizing the property and selling it to recover the amount owed.

By way of example, consider a mortgage. Here, the bank places a lien on the home of the person who took out the mortgage, which will provide them with the right to seize the property in the event of any failure to make payments. Indeed, the lien will typically remain in place until the mortgage is completely paid off.

The existence of collateral means the lender is taking on less risk and, as such, these types of loans typically have lower interest rates and longer windows for repayment.

What is unsecured debt?

As you can probably surmise, an unsecured debt is one in which the person taking out the loan provides no collateral. By way of example, consider things like credit cards, medical bills and even club membership fees.

This complete absence of collateral means that the lender is taking on considerably more risk in the event of a default. Accordingly, these types of loans typically charge higher interest rates and will place considerably more emphasis on a borrower's creditworthiness (credit score, debt-to-income requirements, etc.).  

We'll discuss why this distinction matters as far as Chapter 7 bankruptcy is concerned in a future post …  

In the meantime, if you are experiencing serious financial problems and would like to learn more, consider speaking with an experienced legal professional who can outline your options and answer all of your questions. 

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