Everywhere you look, there are constant advertisements to “get you out of debt” through bankruptcy, refinancing, and other debt consolidation methods. Still, nearly three quarters of Americans live with debt. Understanding how the different types of debt work can help you manage your money and make the right decisions about bankruptcy.

What is Consumer Debt?

Debt is a broad term that covers any circumstance in which you owe money to someone else for anything. It covers unpaid taxes, student loans, and money borrowed from family and friends. Consumer debt includes personal money owed for purchasing goods and services for yourself or your household. Common types of consumer debt include:

• Mortgages
• Car loans
• Student debts
• Medical debt
• Credit cards

According to Ramsey Solutions, the average American household owes over $34,000 in consumer debt. Two thirds of Americans (66%) reported living with consumer debt specifically, and nearly three quarters (72%) said they were burdened by what they owed.

Types of Debt

Not all debt is created equal. If you have more debt than you can afford to repay, understanding how the different types of debt work, and how they will be treated in bankruptcy, can help you prioritize your payments and make good choices in borrowing.

Secured Debt

Every loan is a promise by the borrower to repay the lender what is owed. In a secured loan, that promise is backed up by something of value, called collateral. You secure a loan by agreeing that if you don’t make the payments as promised, the borrower can take possession of the collateral. Mortgages and car loans are the most common types of secured debt. Failure to repay these loans can result in foreclosure on your house or repossession of your vehicle. However, because secured debt presents the least risk to lenders, it often has the lowest interest rates of any consumer debt.

Bankruptcy does not affect your ongoing payment schedule on secured debts. In fact, you must generally reaffirm your intent to repay an ongoing secured loan like a mortgage after you receive a Chapter 7 discharge. However, filing a bankruptcy petition can put a hold on the foreclosure proceedings and a Chapter 13 bankruptcy provides a structured payment plan to catch up on your payments.

Unsecured Debt

Unsecured debt is any money owed without collateral. If a borrower defaults on an unsecured loan, the creditor must attempt to collect from the person directly or file a collections lawsuit to get access to garnishments and other debt collection tools. Because unsecured debt has a higher risk for lenders, it generally has a higher interest rate than secured debt. Common unsecured loan examples include:

• Credit card debt
• Service contracts
• Signature loans
• Membership dues
• Medical bills

Bankruptcy is most beneficial to consumers with significant unsecured debt. A Chapter 7 bankruptcy can discharge most unsecured debt, forcing them to accept less than what is owed.

Revolving Debt

Some lines of credit, like credit cards or home equity loans, create a revolving debt situation. These borrowing agreements allow the consumer to borrow up to a maximum limit. Payments on the debt reduce the balance, allowing the borrower to use more of the lender’s money while keeping the account open, and accumulating interest.

Revolving debt can be secured or unsecured, and the Bankruptcy Court will apply the appropriate rules discussed above. After you have filed a Chapter 7 bankruptcy, any new borrowing against a revolving line of credit will still need to be repaid after your older debt is discharged. It’s a good idea to close those credit cards included in your bankruptcy to avoid building up new debt.

Most Common Types of Debt in Bankruptcy

In addition to the issues discussed above, there are some types of consumer debt that are simply non-dischargeable in bankruptcy. Here is a summary of some of the most common types of debt in bankruptcy, and what happens to them after discharge.

It can be hard to decide to file for bankruptcy and even harder to predict the benefit filing for bankruptcy can give you. Given the different types of debt, and the way they are treated in bankruptcy, knowing what you owe can help you decide whether to file for bankruptcy or use other non-bankruptcy options.

At John A. Steinberger & Associates, P.C., we understand the different types of debts, and how best to get out of them. We are a full-service bankruptcy law firm in Southeast MI, serving debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. We meet with clients facing debt they can’t afford to help them decide whether bankruptcy or another option is best for them. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.