What should we know about unsecured debt when considering bankruptcy?

Most unsecured debts are the common bills we all incur such as credit card debt, medical bills, student loans, utilities, unpaid rent and taxes.
Most unsecured debts are the common bills we all incur such as credit card debt, medical bills, student loans, utilities, unpaid rent and taxes.

Unsecured debts are the debt obligations we incur that are not secured by property like an automobile or home. Secured debts, on the other hand, are protected by the collateral connected to the loan. If you do not pay your car loan, the bank may obtain a court order to seize and repossess the car if you default. Likewise, with your home, unpaid mortgages can be collected by foreclosing on the home. With the unsecured debts, the unpaid creditor can send your file to collections or file a lawsuit to obtain a money judgment to enforce and collect the money owed. If the creditor enforces a judgment, they may attempt to seize money in your bank account or another asset. Filing a petition for bankruptcy protection under Chapter 7 or 13 can stop seizures and collections of money judgments for unsecured debts. See our blog article discussing the automatic stay provision of the bankruptcy code. The automatic stay prevents collectors from continuing any collection activity during a bankruptcy case.

What are the typical types of unsecured debts and how to banks and creditors collect them?

Most unsecured debts are the common bills we all incur such as credit card debt, medical bills, student loans, utilities, unpaid rent and taxes. If you do not pay the unsecured debts most creditors call you frequently to negotiate a payment or some sort of arrangement to bring the debt current. Some creditors will accept a lesser amount than what is due, but be careful because you may find that the forgiven amount ends up being taxable income to report to the IRS.

If you fail to respond or negotiate a fair deal with the creditor, they will most likely send their unpaid account to a collection agency. These phone calls will make most people’s hair stand on end. The collectors are often rude and will try to trick you into doing something foolish such as paying them from your 401(K) retirement funds – don’t do it! Qualified retirement accounts are safe and in most cases, creditors cannot seize and collect that money. The collectors will also likely tell you, if you suggest you are considering a bankruptcy, your financial life and future will come to an abrupt end – also not true! In fact, many people who do seek protection from the bankruptcy courts are able to borrow money, establish credit and finance cars and homes within a few years of a discharge.

In the event you and the collection companies cannot strike a deal, or you dispute the validity of the debt they are trying to collect, your creditor may file a lawsuit against you. A local county sheriff or special process server will likely stop by your home or place of employment to serve you with a summons to appear in court to answer the complaint they file with the court asking for a money judgment. At that point, you can appear in court, by yourself or with a lawyer, and try to settle the lawsuit. If you decide not to appear and do nothing, the court may continue your case one time or enter a default judgment against you. Eventually the creditor will obtain a money judgment and start enforcement.

How can bankruptcy laws protect you from unsecured creditors, collectors and court judgments?

Most unsecured debts can be completely eliminated or reduced in either a Chapter 7 or 13 bankruptcies. Again, as soon as a bankruptcy petition is filed, the creditors must stop almost all collection activity. To learn more the basics of bankruptcy you can listen to several 30-minute podcasts in which Joseph Wrobel explains a variety of bankruptcy subjects – click/tap here for the page on the firm’s website with links to the podcasts. Many people will tell you that the most important thing about a bankruptcy is what you do after a discharge, meaning keeping up with bills and not getting behind unmanageable debt anymore. After a bankruptcy, if you owe less money to creditors, you may look more creditworthy. Many people start re-establishing their credit buy easily obtaining a secured credit card to use for gas, grocery and basic daily living expenses.

If you want to learn more about bankruptcy proceedings, contact an attorney at Joseph Wrobel, Ltd. The firm’s website contains informative videos about financial issues as well as bankruptcy protection for families who want a fresh start. To keep in touch and read about consumer finance news and stories you can Like the firm’s Facebook page and Follow Joseph Wrobel. Ltd. on Twitter. If you need legal assistance, please call Joseph Wrobel, Ltd. by dialing (312) 781-0996 to talk to an attorney.