I’m often asked what is unsecured debt? Why does is matter and why do you ask me all these questions?

There are two main types of debt – secured and unsecured. Secured debt means that there is a lien on some property that guarantees the debt. For example, a loan on a house has a mortgage that is recorded against the property. A mortgage is a secured debt with a lien against the house.  It must be recorded with the local county recorded.

Likewise an automobile loan is secured by the automobile and the lien is recorded with the Department of Motor Vehicles.  If you borrowed money but the lender isn’t on the title then the loan isn’t perfected and there is no lien.

Most credit card debt is unsecured. Once in a while there is a security interest as in a Sears’s account or other store where you make a major purchase. They may have you sign a document that states they have a security interest in the property until it is paid for. The majority of credit card debt is not secured by the purchases that are made.

Medical debts are also usually unsecured. One in a while a practitioner may ask for a security document but it is very unlikely. The normal procedure is to submit the bill to your insurance company and then bill you for the unpaid portion. If you have any major medical issues it can quickly add up.

Sometimes unsecured debt can become secured debt. If there is a judgment taken for a past due credit card debt it can become a lien against property which will change the nature of the debt.  Never ignore court paperwork as the time lines run quickly and a creditor can obtain a default judgment.  That means you never even went into court but they got a judgment and can enforce it in many ways.  One way a creditor tries to collect is to record a lien in the county where you live.

It matters because secured and unsecured debts are treated differently under the law and must be designated properly for each case that is filed.

D is for Disclose

Do I have to list everything in my bankruptcy? Is everything included in my case? Yes. Yes again.

Everything must be disclosed. All debts (everything you owe) must be disclosed. All assets (everything you own) must be disclosed. Assets you hold for others must be disclosed. Closed financial accounts must be disclosed. Safety deposit boxes and the contents must be disclosed. Charitable donations and gifts over a certain sum must be disclosed. Pensions, insurance policies, cemetery plots, motorcycles and art must all be disclosed.*

Disclosures Must Be Complete and Accurate

When you disclose your financial information, assets, debts, income and expenses to your bankruptcy lawyer be as complete and accurate as possible. The value of your assets is what you could sell them for, or the current market value, not what you paid for them. Make a reasonable inquiry using local dealers, Craigslist and or eBay to get comparable values. Have a realtor give you a selling price for your home that is geared to get a quick offer, not a high bargaining position. Use NADA or Kelley’s Blue Book to value your automobile.

Income Disclosures

Let your lawyer know how much your income is and its sources along with your monthly expenses. Include all sources from wages and dividends to social security and pension distributions. Include any investments and losses. Your attorney can decide when and where your information fits into the petition, schedules and financial affairs forms for a chapter 7 or chapter 13. This information will also form the basis for your reorganization plan in a chapter 13.

Possible Audit and Failure to Disclose

You should have documentation for all income, expenses, assets, debts and transactions. One in every 250 bankruptcy cases is audited. If you are chosen for an audit the documentation will be valuable to establish you did your best to be accurate and complete in your disclosures.

Failure to disclose all of your assets, debts, income, expenses and financial affairs can result in you being denied a discharge and you may be charged with a crime. You might spend years in prison and have to pay a substantial fine.

The bankruptcy crime of nondisclosure or concealment of assets may also take the form of transferring or concealing property before you file without making the proper disclosures. If you are completely honest and forthcoming with your bankruptcy attorney you’ll have no problems. Your attorney will know what needs to be provided to the court and will have the documentation to back up her decisions.

*This disclosure applies to all bankruptcy cases and is not to be confused with the written disclosure statement required in a chapter 11 reorganization.

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