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Bankruptcy and Secured Debt

Bankruptcy and Secured Debt

Many people who have to file for bankruptcy believe that all of their debts will be wiped out. Unfortunately, this is not true. While you would be relieved of most of your debts, there are certain types of debts that are not covered in bankruptcy.

When you begin preparing your bankruptcy papers, you would have to organise them into three categories – priority, unsecured, and secured debts. Secured debts are the ones that are not covered under bankruptcy.

miniature house with key

What is a Secured Debt?

The secured debt is the debt that you owe to a creditor secured against certain personal or real property, like a car, land, or house. In you aren’t able to make the monthly payments for a certain duration of time, the creditor can get hold of your property instead.

Real Property and Secured Debt

A mortgage loan is a debt that is secured by your house. When you purchase a house, you are borrowing money in the form of a house mortgage. Additionally, you are promising to repay that loan over a certain period of time. When you sign off the mortgage papers, you also agree that your bank will seize your house if you are unable to make the payments.

Personal Property and Secured Debt

Car loans are also under secured debts. Similar to a mortgage, purchasing a car means you are giving the bank a security interest in your car. Due to this security interest, your car can be repossessed if you are unable to make the monthly payments.

Unlike unsecured creditors, the secured creditors don’t need a court order to seize your property because you made an agreement to property repossession when you took out the loan.

Examples of Secured Debt

Here are some of the secured debt examples:

  • Auto loans
  • Home equity lines of credit
  • Home mortgages

What is Unsecured Debt?

The unsecured debt is the money you owe to creditors who don’t have any security interest in the collateral. Therefore, the creditor doesn’t have the right to take away your property if you are unable to make the payments.

Unsecured debts are basically the opposite of secured debts. Since they aren’t linked to a specific property, no one can take away your stuff, no matter how much you purchase with your credit cards.

The most common unsecured debts include:

  • Student loans
  • Personal loans
  • Medical bills
  • Credit cards

These are the debts that allow you to get a product or service but aren’t backed by any particular asset. Therefore, a creditor can’t take anything away without legal action if you fall behind on your payments. To get the payment, they would have to file a lawsuit against you.

However, keep in mind that the creditors can also utilise other means to get the payment that can result in a negative financial impact on you, like reporting the missed payments or using debt collectors. Therefore, it is essential to avoid ignoring these creditors merely because these are unsecured debts.

What Happens with Secured Debt in Bankruptcy?

When you file for bankruptcy, you must get in touch with the secured creditors to discuss your debt and determine if a solution is available. The bankruptcy won’t change the right of the secured creditor. They would still be allowed to pursue you to make the payments and can seize the property if you can’t maintain the payments.

However, if you are unable to keep up your payments, the secured creditor can repossess the secured asset sell them to recover the loan payment.

If selling the goods still doesn’t cover your doubt, the remaining amount is known as shortfall, which can be listed in your bankruptcy. Once this shortfall is added to your bankruptcy, the creditor won’t be able to further pursue you for the remainder of the debt.

Once you enter bankruptcy, a trustee will be appointed to you to maintain the bankrupt estate. That trustee would be in charge of dealing with any unsecured assets and apply the sale proceeds to paying a dividend to the unsecured creditors equally.

Determining Secure and Unsecured Debt

Bankruptcy can be a tough and lengthy process that must not be done without the guidance of a bankruptcy expert. It is already a stressful process for you, and trying to manage it alone can result in mistakes that you can’t afford to make in this situation.

When you are preparing your papers, you would have to identify the types of debts you have. Identifying unsecured and secured debts would be a significant step that could help you understand your situation better. Often, people believe they can file for bankruptcy when they are not even eligible.

You have to meet two main requirements to apply for bankruptcy in Australia, which are as follows:

  1. You can’t repay your debts on time, and
  2. You are an Australian citizen or have a business or residential connection to the country

There isn’t any fee involved in applying for bankruptcy, and you don’t need any maximum or minimum debt or income amount to be eligible. Moreover, it is also crucial to work with a bankruptcy expert to ensure that there aren’t any other better options available for you to get out of your financial problems.

Once your bankruptcy professional is sure that bankruptcy is the best option for you, they will help you identify secure and unsecured debts and help you understand which debts you would still have to pay.

An experienced bankruptcy expert would also help you file for bankruptcy and help you manage the bankruptcy to rebuilt your credit score. If you have more questions or would like a free consultation to discuss bankruptcy and secured debt, get in touch with our experts.


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