Dubiln Packard

unsecured debt

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About Credit Card Debt

Most credit card debt is unsecured, with the exception of cards issued against a line of credit on a house or other asset. Millions of consumers are carrying more consumer debt than they can afford, making minimum payments or carrying balances at high interest rates. Even when this is not the case, a change in circumstances such as loss of employment or medical emergency can result in late payments, lowered credit scores, and a snowballing cycle of spiraling debt and default.

Consolidation of credit card debt onto a lower-interest card can be helpful. Many consumers have taken advantage of home equity credit lines or second mortgages to consolidate credit card debt, converting unsecured debt to secured debt – and increasing risk to their home in the process. If a borrower is in difficulty, adding unpaid credit to their mortgage balance may offer temporary relief and lower payments, but it’s likely that the unsecured debt will increase again, with the now-higher mortgage obligation decreasing available income to repay it.

In the event of financial calamity, unsecured debt should receive a lower priority for repayment than taxes, home, car or student loans. It may be possible to negotiate a lower interest rate with your lender, or if you’ve gone into default, credit card companies will offer settlement on a reduced balance. The difference between the settlement and the balance may be declared as a payment to you by the credit card company via a 1099, giving you a potential tax liability.

Credit card debt settlement companies charge huge fees to negotiate settlements with credit card companies, often without successfully settling the debts. If you’d like to try to settle a debt, direct negotiation with your lender is often the best option. If your circumstances are serious enough, consult with a qualified attorney to find out if a bankruptcy filing is your best option. If this is the case, your attorney will advise you to stop paying all unsecured debt and have it managed in the bankruptcy proceeding. Your debt may be wiped completely in a Chapter 7 bankruptcy filing, or partially repaid in a Chapter 13 plan that allows you to restructure your finances.

 

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About Personal Loans

Personal loans are unsecured debt. Often given by family members or friends, the borrower may feel a particular obligation to the lender and wish to make a particular effort to repay the loan.

In cases of financial difficulty – and a bankruptcy filing – the court insists on equal treatment of creditors. If a personal loan is paid back just prior to a Chapter 7 bankruptcy filing, the court may attempt to recover the repaid funds from the family member or friend, claiming them for the pool from which all creditors are repaid in bankruptcy. A borrower taking such an action may subject himself to higher payments in his Chapter 13 payment plan and otherwise less favorable treatment from the court.

If you’ve taken a personal loan, don’t repay it if you anticipate you might need to do a bankruptcy filing, unless you’re making equal payments to your other creditors.

The court requires that all debts, including personal debts, be disclosed. This is for the protection of the borrower as well as all of his creditors. In a bankruptcy, the court’s responsibility is to distribute liquidated assets evenly among the creditors without special favor. If a personal debt is not declared in a bankruptcy, the borrower may sue to recover afterwards, claiming it was not covered in the bankruptcy settlement, and may obtain a judgment for the full amount.

The borrower may wish to repay personal loans that have been discharged in bankruptcy. He has the option to do so after bankruptcy is completed.

 

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Secured vs Unsecured Debt

The two basic types of loans are “secured debt” and “unsecured debt.”

Secured debt is a loan underwritten by an asset used as collateral. These loans include mortgages, car loans, and some kinds of consumer loans for durable items such as TVs or furniture.

Unsecured debt includes credit cards and bank lines of credit,

After foreclosure or repossession, that portion of the loan balance unpaid by the proceeds known as a “deficiency” is another form of unsecured debt. It’s the portion of collateralized debt remaining after the underlying asset has been sold. Assets such as cars and other durable consumer goods decline rapidly in value after purchase. In the event they’re repossessed and sold, the proceeds of the sale are usually not enough to cover the balance on the loan, creating the deficiency, for which the borrower will be held responsible.

A deficiency can be discharged in a bankruptcy filing, if it’s created before the filing.

Real Estate can appreciate in value. Historically, it has, at an average rate of 5%/year over the last 100 years – but it can enter periods of decline, as it did precipitously from 2006 to 2011, leaving millions of homeowners “underwater,” owing more on their property than the property can be sold for in today’s market.

Although mortgages are considered secured debt, it is possible a foreclosure sale may bring less than the outstanding balance on a mortgage, creating a deficiency –for which the buyer can be held responsible under certain circumstances. Read more about deficiencies here.

Todd Murphy Law are experienced at restructuring, managing, and in some cases discharging debt.

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Second Mortgages

Second mortgages are treated differently than first mortgages in all circumstances.

In a sale or foreclosure, the first mortgage holder has priority, receiving proceeds of the sale up to the amount of the full remaining balance.

In a Chapter 13 bankruptcy, a second mortgage’s lien on the property can be stripped and the loan converted to unsecured debt, pooled together with other debts covered under the Chapter 13 payment plan. All of the debt in the pool is eliminated on completion of the plan, often with a small portion of the original balance having been paid.

In a Chapter 7 bankruptcy, if the home is kept via a homestead exemption, the lien remains on the property. This situation has been challenged, with a new precedent established in the 11th Circuit allowing a second mortgage to be stripped in a Chapter 7 filing. Judicial thinking seems to be moving in this direction – but in the meanwhile, if a house in New Jersey becomes unaffordable under current law, either filing Chapter 13 bankruptcy or selling it are the available options.

If the property is underwater and is sold or foreclosed upon, sale proceeds go to the first mortgage holder first and any outstanding tax liens second, making it unlikely that the second mortgage holder will recover any funds in the sale. The debt remains outstanding, and the holder of the second mortgage may sue. Since the second mortgage has become unsecured debt as a result of the foreclosure, deed in lieu or short sale, it can then be wiped in a Chapter 7 bankruptcy filing.

Hopefully precedent will soon be established in New Jersey affording Chapter 7 filers the same protections as Chapter 13 filers – but, until then, an unaffordable second mortgage can force a homeowner out of their home unless they can qualify for a Chapter 13 bankruptcy filing.

Todd Murphy Law has extensive experience dealing with Chapter 7 and Chapter 13 bankruptcies and extensive experience negotiating with creditors.

Call Todd Murphy Law today for a free consultation.