The Difference Between Secured Debt and Unsecured Debt

No debt is the same. In fact, debt is usually placed in one of the following categories: secured debt and unsecured debt. Such a categorization is very essential, since it guides you in your borrowing habits and determines the type of payment terms that accompany the debt.

With secured debt, the amount of money you borrow is linked with an asset. This asset functions as collateral for the loan, which means that the creditor (the person who lends the money) can take the pledged item if you as the borrower default on the loan. Thus the collateral secures the loan. Cars and houses are two of the most popular items used for collateral; the idea is that the item has to have a significant amount of value, or can be easily turned into cash to cover liabilities. Examples of secured debt include personal loans, mortgages, and auto loans.

By contrast, an unsecured debt is not secured by any assets—thus the term “unsecured.” So, if you default on your payment obligation, the creditor cannot take any of your belongings. However, the creditor can take you to court and obtain a money judgment against you. Examples of unsecured debts include credit cards, medical bills, student loans, and rent and utility payments

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Can Bankruptcy Remove Student Loan Debt?

Having debt is a burden to anyone. If you are dealing with high amounts of credit card debt, medical debt, and student loan debt, you might consider bankruptcy. Will bankruptcy discharge student loan debt? This is something that has been questioned for years. Here are some things you need to know about Chapter 7 and Chapter 13 bankruptcy, and how it will handle student loan debt.

Hardship

Meeting with an attorney is the best way to figure out what you can do about your financial hardships. There are several solutions available for people seeking to discharge their debts. To have your student loan debt discharged, you need to declare undue hardship. Different courts will need to review your hardship situation to determine if student loan debt can be discharged. If you have a low income, you have a greater chance of getting your student loan debt discharged. It is important to know that most courts are hesitant to discharge student loan debt.

The Brunner Test

One of the things people will undergo to determine if they can discharge student loan debt is to undergo the Brunner test. This test will determine if you meet certain standards including the following:

• Poverty. This test helps the courts to know about your current income and expenses. Can you maintain a standard of living for yourself and your dependants? If the court forces you to repay your loans, will you be able to afford it with your current income?
• Persistence. Will your current financial position continue for several years? The court needs to determine if you can continue with a repayment period for several years based on your job.
• Good faith. Have you made good faith efforts to repay your student loans?

Usually the courts will say you can pay or you cannot pay. To them it is an all or nothing situation to pay your student loan debt.

Totality of the Circumstances Test

Certain courts will use a test called the totality of the circumstances. This court will look at the relevant factors in your case to see if you can repay your student loan debt. You must show your loan began more than seven years ago and repaying the debt will be a financial burden to your life. Some courts enroll you in a payoff strategy to reduce the student loan debt burden, but this can still have a large financial burden on your life.

Meeting with An Attorney

The best thing you can do is meet with an attorney to talk about your situation. The bankruptcy courts differ in each area. A local bankruptcy attorney will help you determine if you can afford to repay the student loans, or if you can qualify to have them discharged through bankruptcy.

Filing with Bankruptcy Court

To discharge your student loan debt, you need to file a formal complaint with the bankruptcy court. This form is called a Complaint to Determine Dischargeability. You then need to prove to the court that you cannot pay off your debt and you are dealing with undue financial hardship due to the debt.

Finding Defenses

Several attorneys will work hard to find a defense to help you discharge your debt. Certain defenses often include deceptive business practices or fraud on the part of the school. Several trade schools and vocational schools often deceive people to get them enrolled in the school. If you succeed with this defense, you will be able to get rid of the student loan debt. In most cases, an attorney can help to bring you a successful outcome when you are dealing with student loan bankruptcy or bringing a defense to the loan.

Are All Student Loan Debts Discharged?

What will happen if the court doesn’t discharge your student loan debts? There are several things that will happen after this point. In Chapter 7 bankruptcy, if the courts deem your student loan debt is not causing undue hardship, you are still responsible for them when the case ends. With Chapter 13 bankruptcy, you can have alternative ways to repay the student loan debt. A reduced payment amount is the most common agreement for student loan debt repayment. You will be given a repayment plan, and then you are held to the complete payment left once the payment plan ends. Your attorney can help you work with the banks to figure out the best situation to help you properly repay your student loan debt so that it doesn’t lead to increased financial hardship.

Other Ways to Handle Student Loan Debt

If the student loan debt is the main issues causing you financials stress, there are some other things you can do. Contact the lender directly to negotiate a new payment agreement. Most banks are willing to extend the loan term to allow for a smaller monthly payment. This is a great way to keep the payments affordable for your situation. The other thing you can try doing it calling a debt consolidation company. This is a non-bankruptcy method to deal with student loan debt as they help to negotiate for a lower amount to repay the debt. Not all banks are willing to accept a lump sum payment, so it is essential to do what you can to focus on repaying the debt as quickly as possible.

The Positives of Bankruptcy

Far too often people stop paying their bills because they simply do not have the money to pay. Is bankruptcy the right decision? Can it help you start a new life free of debt and financial burdens? Declaring bankruptcy is actually something that can help you, and can protect you from dealing with serious legal problems. Did you know creditors can sue you if you do not pay your bills? They can place a lien on your home! Declaring bankruptcy is a great way to legally tell your creditors you do not have the money to pay your bills. Financial expert Suze Orman recommends declaring bankruptcy if this is the first time you have gotten into financial trouble and you are facing collection letters with debt that continues to accrue interest, it is time to consider declaring bankruptcy to start your financial life over.

The Automatic Stay

Once you file bankruptcy, you will receive immediate protection from collection activity. This will prevent a bank from foreclosing on your home. It prevents problems with license suspensions, repossessions, garnishments, and creditor harassment. Based on the bankruptcy option you declare, and the amount of debt you are dealing with, the stay can have different lengths.

Bankruptcy Protects Your Assets

Each state has different bankruptcy laws and requirements. Assets will be valued differently and some will be exempt during the bankruptcy process. Your assets are things that you own like your car or your home. A bankruptcy filing will have financial experts review your finances to determine what is exempt and which assets should be surrendered to pay off your debts.

Discharging Debt With Bankruptcy

A major advantage to declaring bankruptcy is that it will end up discharging all your unsecured debts. This means you are no longer under legal obligation to repay the debts. If you choose to discharge a car loan, you could potentially lose the car in the repossession phase.

Bankruptcy Prevents Mortgage Foreclosure

If you declare Chapter 13 bankruptcy, you can combine your mortgage, student loans, car payments, and other debts into a single monthly payment. This can help you to pay for your assets without the fear you will lose them. It makes your financial obligations more affordable and allows your life to be improved financially. Get in touch with the right financial counselors to help you understand the good things about bankruptcy and why you need to consider declaring it.

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