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Secured vs. Unsecured Debt
Secured Debt is debt that is tied to an asset (i.e., mortgage, car title loan, equipment lease). Unsecured Debt is debt that is not tied to an asset (i.e., credit cards, medical bills, private loans). Understanding the difference will help you determine whether you can negotiate a workout with the creditor. Secured Debt is more difficult to deal with because a secured creditor has the right and power to repossess the asset (state dependent). For example, a bank will foreclose on a home and a car title lender will repossess the vehicle. Moreover, a secured creditor could take an additional step and sue a debtor for breach of contract to collect the unpaid balance of the promissory note. Secured creditors are typically less likely to negotiate a workout on the secured debt. Unlike a Secured Debt, an Unsecured Debt is more willing to negotiate a workout. An unsecured creditor may only sue on the underlying promissory note in hopes of collecting any monies. If a debtor were to threaten to file or file for bankruptcy, the unsecured debt(s) would be erased/discharged; however, a debtor must keep in mind that a bankruptcy imposes a limitation on unsecured debts and a fraud claim may be raised to make the unsecured non-dischargeable. Therefore, an unsecured creditor is more open to negotiating and resolving an unsecured debt in fear of the unsecured debtor filing for bankruptcy. If you are unsure whether your debts are secured or unsecured, our firm will perform a complimentary audit of your outstanding debt(s) to help you make a determination.
Medical Debt is one of the top 3 reasons most Americans cannot afford to live comfortably. Medical professionals, hospital bills, and medication costs are marked up typically three times more than what insurance companies are charged. Furthermore, the insurance coverage sold by healthcare carriers is simply too expensive for most Americans to afford a top-tier plan. It is common, and unfair, for most Americans to fall behind financially because of medical debts. Many Americans are ashamed because he/she cannot pay his/her medical bills, but he/she should not be ashamed because the medical system is unfairly designed. If you owe medical debt and believe you should not be responsible for the unjust amount charged, call our office today. If you are unsure what is medical debt entail, click on this link.
Types of Medical Debt
Medical Debt arises from any medical treatment(s) that are not completely covered by your healthcare provider. Some common examples are:
- Visits to the emergency room or urgent care
- Visits to the doctor or hospital for annual check-ups
- Assisted Living / Hospice / Nursing Home
- Medical credit cards
- Car accident
Credit Card Debt
Credit Card Debt is probably the number one reason Americans file for bankruptcy. Credit cards can surely help; however, the credit card companies’ goal is for a borrower to not pay off the credit card balance in a short period of time or default so the credit card companies could impose an eye-gouging interest rate (i.e., 18% – 29%). Most Americans use credit cards as a short term loan with full intentions of paying them off or over a short-term; however, when money does not come in or a business venture fails, there is nothing one can do. Credit card debt is very normal and many Americans, including multi-millionaires, have this problem. If you find yourself failing to pay off your credit card balance or only able to make minimum payments each month, it may be time to consider other avenues to help with your credit card(s).
Car Accident could cause you to owe an unsecured debt. Every driver in America is required to purchase and maintain minimum car insurance coverage (e.g., $5,000 vehicle damage; $15,000 bodily injury); however, the minimum car insurance coverage is typically less than the actual damages that arise from a car accident. When a driver is at-fault and his/her car insurance coverage is insufficient to cover the vehicle damages or bodily injury damages sustained by the victim, the driver will be personally responsible for the difference. Ex: a family friend of Mr. Phan was charged with $500,000 in bodily injury damages that he personally had to pay because his car insurance policy was only $50,000 for bodily injury coverage. Most Americans do not know that his/her driver’s license may be suspended for non-payment of damages arising from a car accident. Therefore, if you have an unsecured debt which arose from a car accident, contact our office for a free consultation.
Personal Loan is a loan to an individual for any purpose, and the loan could be a secured or unsecured debt. The loan could be secured if the lender requested a collateral or filed a security instrument (UCC-1/UCC-3) against your personal property. If no collateral was pledged or security instrument was filed, then the personal loan is unsecured. An unsecured personal loan is treated like any unsecured debt, so a workout can be negotiated or be discharged through bankruptcy. Please contact our office if you would like assistance with your personal loan debt.
Business Loan is a loan to a business for any business purpose, and the loan could be a secured or unsecured debt. The loan could be secured if the lender requested a collateral or filed a security instrument (UCC-1/UCC-3) against your personal property. Ex: if a business is purchased equipment for the business, the lender will require the equipment be pledged as collateral and file a UCC-1/UCC-3 against the equipment, so the lender may lawfully retrieve the equipment if the business fails to repay the loan. If no collateral was pledged or security instrument was filed, then the business loan is unsecured. An unsecured business loan is treated like any unsecured debt, so a workout can be negotiated or be discharged through bankruptcy. Please contact our office if you would like assistance with your business loan debt.
Equipment Leasing is when a company leases equipment to an individual or business. The equipment could be anything from computers, desks, chairs, televisions, and HVAC systems. Because the equipment is leased, the equipment leasor is still the title owner and the lessee must return it at the expiration of the term unless the lease is a lease-to-purchase. Then, title to the equipment transfers to the lessee after the term of the lease. If a lessee fails to pay for the equipment as set forth in the equipment lease, the lessor can legally retrieve the equipment from the lessee and sue the lessee for breach of contract. The damages arising from the breach of contract is an unsecured debt. If you are going to be in default or already in default with your equipment lease, contact our office today for a free consultation.
Judgment is a court order granting money damages or compelling the losing party to act in a specific manner (e.g., perform or forbear). Money damages are considered unsecured debts, and the prevailing party may assert collection methods that a typical unsecured creditor cannot. A judgment creditor may levy your bank accounts, garnish wages, and obtain a turnover order on your financial interests in companies. A judgment creditor is less likely to negotiate a workout because the judgment creditor could seize your assets without your consent. One of the methods to encourage a workout is threatening bankruptcy or being collection proof. If you want to understand what is “collection proof,” click on the link here. If you have a judgement or about to receive a judgment against you, please immediately contact our office for a free consultation.
Bankruptcy is a federal proceeding where an individual or business requests that his/her/its debts are discharged/erased or restructured. There are different types of bankruptcies and each bankruptcy type is referred to as a “chapter.” The most common bankruptcy chapters are 7, 11, and 13 (each of the bankruptcy chapters have a link for you to learn more. Bankruptcy is a reset button for many individuals and businesses. Many individuals and businesses encounter financial difficulties, economic recession, or unforeseen circumstances, which leads an individual or business to seek bankruptcy to stop the bleeding. Ex: an individual has $35,000 in credit card debts and can no longer make minimum payments because he just got laid off. Ex: a restaurant owner can no longer afford rent and keep her business open because the Coronavirus quarantine has essentially stopped sales. Bankruptcy is not an option to take lightly; however, if you are considering bankruptcy for relief, please contact our office for a free consultation.
Chapter 7 Bankruptcy
Chapter 7 Bankruptcy is a bankruptcy that discharges/erases a petitioner’s unsecured debts. This is the most common bankruptcy filed by individuals and businesses, but to qualify, an individual or business must pass the Means Test and demonstrate that his/her/its liabilities exceed his/her/its assets.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy is a bankruptcy that restructures a petitioner’s secured and unsecured debts. The petitioner will negotiate a 3-year or 5-year payment plan (based upon Means Test) to repay all his/her/its creditors, and the monthly payment will be based off available net income. Any debts that still exists after completion of the payment plan is discharged/erased. Bear in mind, there are secured debts and unsecured debts limitations for qualifying for Chapter 13 bankruptcy. In 2019, secured debts cannot exceed $1,257,850.00 and unsecured debts cannot exceed $419,275.00.
Chapter 11 Bankruptcy
Chapter 11 Bankruptcy is a bankruptcy that restructures a petitioner’s secured and unsecured debts. This sounds like a Chapter 13 bankruptcy; however, Chapter 11 is utilized by individuals or businesses that (i) do not want to liquidate his/her/its assets, or (ii) secured debts and/or unsecured debts exceed Chapter 13 limits. Furthermore, unlike a Chapter 13 where a trustee is appointed to manage the finances of the bankruptcy, a petitioner in Chapter 11 becomes a “debtor-in-possession” and manages the finances of the bankruptcy. The major advantage to a Chapter 11 is for an individual or business to (i) reduce the interest rate, (ii) reduce the principal balance of a loan to the market value of the asset, and (iii) extend the payment length of promissory notes.
Non-Dischargeable Debts in Bankruptcy
Non-Dischargeable Debts in Bankruptcy are debts that cannot be discharged in bankruptcy, which is described in 11 U.S.C. Section 523(a) (https://www.law.cornell.edu/uscode/text/11/523). Some of the most common claims for non-dischargeability are: fraud, misrepresentation, spousal support, and child support. Before filing for bankruptcy, the petitioner should consult with an attorney to determine whether a creditor may have a cause of action for a non-dischargeability claim and whether the petitioner is prepared to contest the claim in an adversary proceeding (a lawsuit within a bankruptcy). Note: a creditor must raise a non-dischargeability claim. If you are worried about a potential non-dischargeability claim, you may contact our office for a free consultation.
Misrepresentation vs. Fraud
Misrepresentation is a false statement or act made unintentionally. Fraud is a false statement or act made intentionally. Ex: a car salesperson tells a customer that the car qualifies for extended warranty and the customer could purchase it within 30-days from the purchase date. However, when the customer comes back to purchase the extended warranty, the dealership denies an extended warranty. This is a misrepresentation made by the car salesperson. Ex: a realtor informs a customer that the customer’s children will qualify to attend a specific school if he purchases this home and knows the home is not within the school district. When customer tries to enroll his children in the school, he is rejected because the home is not within the school’s district. This is fraud because the realtor knew that the home was not within the school district and still made the representation to customer. A judgment or damages arising from misrepresentation or fraud is non-dischargeable.
Debt Settlement vs. Debt Consolidation
Debt Settlement is a process where a debtor negotiates with a creditor to pay less than the balance owed on a debt. Ex: a debtor has a balance of $2,000 on their credit card and negotiates to pay $1,400 as full and final settlement for the $2,000 credit card debt as payment in full. Debt Consolidation is a process where a debtor combines all of his/her/its debts into a single amount and makes monthly payment that is allocated and distributed to each creditor until paid off. Ex: a debtor owes $4,000 to credit card A, $1,000 to credit card B, and $3,000 to credit card C. The debtor’s minimum monthly payment is $800 each month for all three credit cards. Debtor does a consolidation where he agrees to pay $8,000 in credit cards debt at $500 monthly at a lower fixed interest rate.