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Secured vs. Unsecured Debt: What's the difference?

Posted by John Ioakimidis | Aug 30, 2023 | 0 Comments

There is a common misunderstanding that filing for bankruptcy in Illinois will result in the discharge of all your debts. While it would be ideal for those experiencing financial difficulties to start anew, this is not always the case. The extent to which debts are discharged is determined by the type of debt and the bankruptcy chapter under which one files.

The Type of Debt You Have Matters in Illinois Bankruptcy Cases

It's important to understand that not all types of debt can be eliminated through bankruptcy. That's why it's crucial to be aware of dischargeable and non-dischargeable debts, as well as those that may be dischargeable under specific circumstances. There are two primary categories of debt: secured and unsecured. It's essential to have a clear understanding of these types of debt before filing for bankruptcy..

What is Secured Debt in Bankruptcy?

When you take out a loan that is secured by an asset, it is called a secured debt. For instance, if you purchase a car and take a loan to buy it, you sign a document acknowledging that if you fail to make payments as agreed, the lender can repossess the car. This is because the money you borrowed was secured by the car. 

If filing Chapter 13 bankruptcy is an option, you will need to make a decision regarding any secured collateral you have. You can either keep the collateral and continue making payments or you may need to return the property to the lender.

When a debt is discharged in bankruptcy, it means that the debtor is no longer responsible for paying it. However, in cases where the debt was secured by property, the lender still has the right to repossess that property. For instance, if someone files for Chapter 7 bankruptcy and has a mortgage on their home, the mortgage debt may be discharged, but the lender can still foreclose on the home. On the other hand, unsecured debt is a type of debt that is not backed by collateral.

What is Unsecured Debt in Bankruptcy?

Unsecured debt is a kind of debt that doesn't require collateral such as a house, car, or other property. Credit card debt is a perfect example of unsecured debt. When you apply for a credit card, the credit card company sets a specific limit for your card. By accepting the terms and conditions, you agree to pay back any amount charged with interest. The loan is solely based on your agreement with the lender. If you fail to pay back the debt, the lender's options are limited and they can't seize any of your possessions.

Bankruptcy courts have classified unsecured debt into two categories for better differentiation: priority unsecured debt and non-priority unsecured debt. Priority unsecured debt is given priority over non-priority unsecured debt and includes child support, alimony, personal injury claims, and unpaid wages of employees. Non-priority unsecured debt, on the other hand, includes medical bills, credit card debts, and personal loans.

Dischargeable vs. Non-Dischargeable Debt in Chapter 7 cases filed in Illinois

In Illinois, Chapter 7 bankruptcies can discharge both secured and unsecured debts, but with exceptions for some unsecured debts.

Dischargeable Debt

The following debt can be discharged in a Chapter 7 bankruptcy:

  • Credit card debt 
  • Medical bills
  • Certain income taxes
  • Personal loans
  • Personal guarantees
  • Student loans in limited circumstances

Non-Dischargeable Debt

In a Chapter 7 bankruptcy, some types of debt are not eligible for discharge, including most student loans, debt incurred through fraud (such as lying on an application), money obtained in anticipation of filing for bankruptcy, and certain income taxes. It's important to understand the difference between dischargeable and non-dischargeable debt in a Chapter 13 bankruptcy as well.

Chapter 13 Bankruptcies in Illinois: Dischargeable vs. Non-Dischargeable Debt

Chapter 13 bankruptcies in Illinois discharge both secured and unsecured debts..

Dischargeable Debt

Debts that can be eliminated through Chapter 13 bankruptcy include:

  • Credit card debt
  • Debt resulting from payment of taxes that cannot be discharged
  • Medical bills that insurance doesn't fully cover
  • Debt arising from your damaging someone else's property
  • Unsecured personal loans
  • Penalties and fines owed to government agencies
  • Certain tax obligations
  • Judgment debt, which typically involves a court ruling against you for negligence, personal injury, or breach of contract

Non-Dischargeable Debt

There are certain types of unsecured debt that cannot be eliminated in a Chapter 13 bankruptcy. These debts include child support, alimony, criminal penalties, DUI penalties, and judgment debt. Normally, judgment debt can be eliminated, but there are cases where the other party may object and provide qualifying reasons for why the judgment debt should be exempt from dischargeable debt. It is important to distinguish between dischargeable and non-dischargeable debt in bankruptcy.

Dischargeable vs. Non-Dischargeable Debt in Chapter 11 Cases in Illinois

When businesses or individuals with assets need to reorganize, rehabilitate, or liquidate, they often file for bankruptcy under Chapter 11 in Illinois.

Dischargeable Debt

In some cases, businesses or consumers may opt to restructure their debts instead of pursuing liquidation through Chapter 11. If they do choose to liquidate, certain types of debts may be discharged, such as business debts, credit card bills, back rent, certain income tax, business loans, medical bills, personal guarantees,and personal loans. However, there may be some debts that cannot be discharged.

Non-Dischargeable Debt

When a business or individual files for bankruptcy under Chapter 11, they are still responsible for paying back certain types of debt that cannot be discharged. These include debts for alimony, spousal support, or child support, certain tax debts (such as fraudulent tax returns), education loans that were government-funded or guaranteed, educational benefit overpayments, consumer debts for luxury goods or services that were incurred with a single creditor for over $500 within 90 days before the bankruptcy order and cash advances totaling over $1,100.00 within 70 days of filing bankruptcy.

Contact a Bankruptcy Attorney in Illinois Today

If you're struggling with your finances in Illinois, filing for bankruptcy can be a helpful solution to get your life back on track. However, it's important to know which types of debt can and cannot be discharged in the process. That's where Attorney John D. Ioakimidis comes in - he can answer your questions, assess your financial situation, and provide guidance throughout the process. To schedule a free consultation, either call us at 1-312-593-1765 or fill out our online contact form.

About the Author

John Ioakimidis

Experienced Bankruptcy Lawyer Handling Bankruptcy case in the Chicago Metropolitan Area For over 25 years, I have helped hundreds of individuals, families, and businesses erase or restructure tens of millions of dollars of debt in the greater Chicago area - including Cook, Lake, DuPage, McHenry,...


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