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When a debt does not have an asset attached to it as collateral, such as credit card debt, medical debt or unpaid utility bills, it is an unsecured debt. When someone fails to pay their unsecured debt, the creditor does not have any property to take back without a court judgment.
This is different from a secured debt, which is an asset that serves as the debt’s collateral and failure to make these payments will allow the creditor to seize the property. Many bankruptcy cases in the United States deal primarily with unsecured debts, which can frequently be wiped out in Chapter 7 or Chapter 13 cases.
“At The Sparrow Law Firm, we recognize that each case is uniquely different.”
Are you considering filing for Chapter 7 or Chapter 13 bankruptcy because of an overwhelming amount of unsecured debt? Make sure you contact The Sparrow Law Firm right away to further discuss all of your options.
Our firm has helped scores of people navigate the bankruptcy process and find financial freedom. We will be able to get started for you as soon as you call 281-973-0431 or contact us online to receive a free consultation.
Types Of Unsecured Debts
Typical forms of unsecured debt include:
- Department store charges
- Credit card bills
- Student loans
- Telephone, electric and other utility bills
- Medical bills
- Personal loans without a security agreement or mortgage
- Court judgments not yet enforced through remedies such as garnishment or attachment
- Income taxes (unless they are delinquent enough to go into collection and become subject to a governmental lien)
- Back rent
Most debts are unsecured. The primary exceptions are home and auto loans, which are almost always secured.
Another form of an unsecured claim is an advance on a line of credit. Some of these lines are unsecured, with only a promise of repayment against them. Obligations such as home equity lines however are often secured claims.
When someone does not make their payments on such a debt, the creditor has the right to contact them to pursue repayment, report the overdue bill or a credit reporting agency or even file a lawsuit. Typically, an unsecured creditor is unable to seize assets without first gaining a judgment from a court.
To earn such a judgment, they need to file a complaint in the proper legal channels and then serve the debtor with a copy, starting the lawsuit. The debtor has the ability to file an answer to the complaint, and even contest the lawsuit before a judgment takes place.
If a creditor does earn a judgment against a debtor, collections can begin. The collections process is specified by state law, allowing a creditor to pursue the debt in some of the following ways:
- Place the debtor under oath to collect necessary information for debt collection
- Garnish their income
- Collect and sell real estate and other valuable assets
Article 16, Section 28 of the Texas Constitution plainly states no current wages for personal service shall ever be subject to garnishment, except for the enforcement of court-ordered child support payments or spousal maintenance. Unpaid taxes and student loans can also lead to possible wage garnishments.
If a debtor defaults on a federal student loan, the Department of Education can garnish their wages by up to 15% of their disposable income without pursuing a judgment from the court. Tax authorities at a state and federal level can pursue collection methods without going to court as well.
Bankruptcy Effects On Unsecured Debts
Chapter 7 bankruptcy erases most types of unsecured debt. However, some unsecured debt is nondischargeable in Chapter 7 bankruptcy, including child and spousal support, student loans, recent debts for luxuries, debts incurred on the basis of fraud, and tax debts first due within the previous three years.
A person may be able to keep their home in a Chapter 7 bankruptcy if they have enough through a homestead exemption or other personal property exemptions. The individual will also need to be current on their mortgage payments.
When an individual filing Chapter 7 does not own a home, their personal property could be subject to being used to repay some creditors, but many forms of personal property are often protected. It can be possible to exempt some motor vehicles, clothing, furnishings and goods, household appliances, personal effects, pensions, tools of a trade, home equity and public benefits.
Chapter 13 bankruptcy divides debt into secured debt, general unsecured debt and priority unsecured debt. The amount each debtor will have to pay for each debt can differ.
For example, a person will pay off all of their priority debt, like tax debt and child support, then they will make their secured debt payments, like a mortgage or car loan.
All debts that are not a priority or secured are unsecured debts. The amount you pay for your unsecured debt is the greater value of your disposable income or what creditors would have earned in the event you applied for Chapter 7 bankruptcy.
Disposable income means that a person will have to spend all of it on the plan. The amount the creditors received is based on factors like the money left over from allowed expenses, paying secured debts and priority claims.
At a minimum, unsecured creditors have to receive the amount that a person filing for Chapter 7 bankruptcy would have paid them. To put it simply, the amount they receive is the same as the value of the asset that is not protected by a bankruptcy exemption.
It is also worth noting that priority creditors are unsecured, which means that after paying them, a debtor will then pay unsecured creditors, who will receive any remaining funds.
With Chapter 13 bankruptcy, a debtor needs to commit all of their “disposable income” to their repayment plan. This income goes to the secured and priority debts, then the unsecured debts.
The amount of money that a debtor has left over after paying for essential expenses for living is known as “disposable income.” A court will determine this value by using the Chapter 13 means test forms, which is a similar process to how a court determines eligibility for Chapter 7 bankruptcy.
When someone files for Chapter 13 bankruptcy, they will need to fill out a statement that confirms their monthly income based on the six months prior to the application. A test will compare the average income to the median income of others in a similar household.
If their income is higher than the median, they will need to complete the Chapter 13 Calculation of Your Disposable Income form, which applies deductions for living expenses and other qualified costs. This result will present a figure that determines how much unsecured creditors will receive over the course of the repayment plan.
If their income is lower than the median, the applicant will not have to complete the form. A court will determine the disposable income value based on certain schedules, like Schedule I which lists actual monthly income from all sources, and Schedule J which lists actual monthly expenses. The unsecured creditors will collect a percentage of this income after the secured and priority creditors collect their payment.
The “best interest of creditors” test determines the lowest amount of money that a debtor will need to pay nonpriority unsecured creditors by applying for Chapter 13 bankruptcy. The purpose of this test is to make sure that creditors are not vulnerable because a debtor applied for Chapter 13 over Chapter 7.
If an applicant cannot meet the minimum amount of payment, the court will not approve their application for Chapter 13 bankruptcy. A debtor must pay the greater value of either their disposable income or the value of their nonexempt property to earn a Chapter 13 bankruptcy.
Essentially, a creditor related to your bankruptcy will be able to collect at minimum the equal amount of the assets in question, no matter which bankruptcy option you choose. Only the method of repayment will change between bankruptcy types.
Through Chapter 7, a debtor can keep the assets they need to work and live. The trustee will need to sell any other assets to pay back the creditors.
In Chapter 13, the debtor can keep their assets, as they will pay off their debt in the form of a repayment plan. This option ensures that creditors will receive roughly the same amount between either option.
The best interest of creditors test determines the amount that nonpriority or unsecured creditors will receive through Chapter 7 bankruptcy, and ensure they receive about the same amount through Chapter 13.
“Don’t Be Afraid Of Unsecured Debt in Texas”
– Ikaha M. Sparrow
Texas Unsecured Debts Resources
Chapter 13 – Bankruptcy Basics – USCourts.gov – Visit this United States Court website to learn more about unsecured debts in Chapter 13 bankruptcy. Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual’s unsecured debts are less than $394,725 and secured debts are less than $1,184,200. A Chapter 13 plan does not need to pay unsecured claims in full as long it provides that the debtor will pay all projected “disposable income” over an “applicable commitment period,” and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor’s assets were liquidated under chapter 7.
Secured vs. Unsecured Debts: What’s the Difference? – Read an article on The Balance about the differences between secured and unsecured debt. See how secured and unsecured debts are defined and view examples of each. Learn more about prioritizing secured and unsecured debts.
Contact An Unsecured Debts Lawyer In Houston | The Sparrow Law Firm
If you just cannot handle the amount of unsecured debt that you are currently dealing with, you should seek legal representation for assistance filing Chapter 7 or Chapter 13 bankruptcy. The Sparrow Law Firm is ready and willing to help you right now.
Our firm can take the time to really review all of your current living expenses and help you determine the best possible path forward. Call 281-973-0431 or contact us online today to let us really sit down with you and talk about everything you are dealing with during a free consultation.