Chapter 7 Bankruptcy is a really powerful tool for helping people get out of debt and getting a fresh start. But a lot of people have this idea that you lose everything when you file for bankruptcy, your house, your car, your tv and computer, your dog...everything.
For a variety of reasons, that’s just not true.
In fact, for a lot of people who file for Chapter 7 bankruptcy, the only thing they lose is a lot of debt. And the type of debt that they’re getting rid of is primarily what we call unsecured debt.
Unsecured debt is any debt that you have that's not secured by property. Another way of saying the same thing is that unsecured debt isn’t tied to any collateral.
If you fall behind on unsecured debt, whoever you owe the money to isn’t going to be able to swoop in and take a specific piece of property from you. Instead, they’re probably going to send your account to collections, which means you’re going to be hearing from debt collectors and eventually you may get sued over the debt.
We can contrast that really quickly with a mortgage or an auto loan, both which are both secured debts. We all know that you'll likely lose your house in foreclosure or your car to repossession if you don’t pay your mortgage or auto loan, and that's because the home and the car are collateral and they’re securing the debt.
That’s not the type of debt that Chapter 7 is intended to get rid of.
The most common examples are going to be your credit card debt, debt from medical bills, personal loans, and payday loans. Chapter 7 bankruptcy is actually really good at getting rid of this type of debt. Listen to this
74% Of Chapter 7 Bankruptcies involve credit card debt
52% Involve medical bills
34% Involve personal loans
27% Past due utility bills which I didn’t even mention a second ago
And debts in collections, civil judgments, payday loans, past-due rent, and overdrawn bank accounts are all included in between about 5 to 20 percent of all chapter 7 bankruptcies.
If you're dealing with a lot of debt collectors, then you'll be happy to know that Chapter 7 doesn’t have any special protection them. You can get rid of that debt in a chapter 7 and be done with debt collectors.
There’s another type of unsecured debt that gets discharged frequently in Chapter 7 bankruptcy that's not on the list I just mentioned, and that’s repossession deficiencies. A repossession deficiency is when your car gets repossessed and then you get a bill afterward. This happens because after they repossess your car, they take it to auction to sell it, and when it inevitably gets sold for less than the amount you owe on the loan, you’re going to get a bill for the difference and be expected to pay it. This type of bill is an insult to the injury that is the repossession, because if you didn’t have the money to make your monthly payments then you’re not going to have the money to pay the $3,000 or $5,000 or $10,000 bill you just got hit with after they took your car. If you have a repossession deficiency or you’re expecting one, then know that's something you can get rid of with a chapter 7 bankruptcy.
If you're struggling with unsecured debt and don't see a way out, then chapter 7 bankruptcy may be a good option for you. If you're in Central Texas you can contact my office between 8am and 8pm Monday through Friday or 7am to 11pm on Saturdays and Sundays.