Bankruptcy can affect anyone. From individuals to entire countries, the decision to file for bankruptcy is a substantial one. The implications of filing can be far-reaching. For example, in filing for Chapter 7 bankruptcy, there is the potential that you will lose all of your personal assets. Even with all of the risks, however, filing for bankruptcy may be your most viable option.  Depending on the types of debt that you owe, filing for Chapter 7 bankruptcy may be able to offer you some relief.

Secured and Unsecured Debts

In understanding which debts may and may not be discharged under Chapter 7 bankruptcy, it is easiest to first distinguish between secured and unsecured debts. A secured debt is an obligation that your creditor has guaranteed payment by receiving a lien or mortgage on the loan. By holding this instrument, the creditor has the option to claim the property in the event of default by the borrower.

For example, let us suppose that Party A goes to Bank B to request a loan for a car. The two parties agree to repayment, and Bank B secures a lien on the car. If Party A fails to make the agreed-upon payments, Bank B has the option to take ownership of the property (the car) and sell it in an effort to secure the funds it is owed. For this reason, most lenders offering a secured loan will require that the borrower agree to maintain the property in a responsible manner – it will be harder to sell if it has been damaged.

Another example of a secured debt is a mortgage on a home. Most mortgage agreements allow the bank to foreclose on the home in the case of default by the borrower. The bank’s loan to the borrower is secured by the fact that the bank will be able to take possession should the borrower fail to make the agreed-upon payments.

As you might have figured, unsecured loans are the exact opposite. These loans are based solely on the borrower’s promise to repay. The lender issues the loan to the borrower without requiring that the lender offer up any security. An example of an unsecured loan would be a credit card agreement. The bank sets up a line of credit for you, and you agree to repay the loan plus interest. Failure to pay will not typically allow the bank to repossess specific property. Because the loan is unsecured.

Debt in Chapter 7 Bankruptcy

Generally, Chapter 7 bankruptcy claims may discharge any unsecured debt. This means that items like credit card bills, personal loans, lawsuit judgements, and medical bills may be discharged when filing for Chapter 7 bankruptcy. There are a few exceptions to this general rule. One of these exceptions is loans that were not secured in good faith or that were secured through false pretenses.

If, in applying for a loan, you have misrepresented a material fact to a creditor, you may have secured the loan through false pretenses. An example would be lying about your job status on an application. If, in filling out the application form for the loan, you tell the creditor that you are the CEO of a small business with an income of $120,000.00 every year, chances are that the bank will extend you a higher line of credit. If, in reality, you are unemployed, then you have secured the loan under false pretenses. The lender relied on a material fact (your job status) in deciding to extend you the line of credit. If the representation was made in writing and was material in the creditor’s decision making process, your unsecured loan may not be eligible for discharge under Chapter 7.

In some cases, secured debt may also be discharged in Chapter 7. Using the example of the car mentioned earlier, let us pretend that Party A has filed for bankruptcy and would like to discharge the debt owed to the creditor that provided the money to purchase the car. If the creditor holds a security interest in the car, you may be able surrender the car to the creditor and have the remaining debt discharged.

If you are considering filing for Chapter 7, it is always advised that you speak with an experienced bankruptcy attorney. For example, in some cases where a creditor is attempting to claim property under a secured loan, the lien may be invalid. This development will have serious consequences on any potential bankruptcy proceedings. A skilled attorney will be able to help navigate such considerations.

Reach Out Today

Do you need a California bankruptcy attorney? If you are considering or are in the middle of bankruptcy procedures, take the time to reach out to one of our offices today. With offices in San Diego, Orange County, and Los Angeles, we at the Bankruptcy Law Center are dedicated to offering our clients the guidance and advocacy they deserve as they start down the road to recovery. If you need help, reach out to one of our offices today for a free consultation, and let our team of experienced attorneys get to work advocating for you.