Not all debt is treated the same in bankruptcy. Understanding the difference between secured vs unsecured debt is essential to determining how property and repayment will be handled during your case.
This guide explains how secured and unsecured debts are treated under Chapter 7 and Chapter 13 bankruptcy in Pennsylvania, including discharge eligibility and how assets may be affected.
What Is Secured Debt?
Common examples include:
Mortgages (secured by your home)
Auto loans (secured by your vehicle)
Title loans and secured personal loans
If you fall behind, the lender has the legal right to repossess the asset or foreclose on it. In bankruptcy, this matters. The value of the collateral can affect what happens next — whether you can keep the property, how much you may need to repay, or if surrendering the asset is the better choice.
What Is Unsecured Debt?
Unsecured debt isn’t tied to any specific property. There’s no collateral. That means the lender can’t take your belongings if you stop paying — but they can still sue you, damage your credit, or send your account to collections.
Common types of unsecured debt include:
Credit card balances
Medical bills
Personal loans
Utility bills
In bankruptcy, unsecured creditors don’t have the same rights as secured ones. They can’t repossess anything, but they can file claims. In Chapter 7, many unsecured debts can be wiped out completely. In Chapter 13, they’re often paid last — and sometimes not at all — depending on your income and available assets.
While there’s no risk of repossession, these debts can still seriously affect your credit score and financial stability if left unresolved.
Key Legal Differences Between Secured Vs Unsecured Debt
Understanding how the law treats different types of debt is critical before you file for bankruptcy. Secured and unsecured debts don’t just affect how much you owe — they shape what you risk losing, what gets discharged, and what your legal strategy should be.
Creditor Rights
Secured creditors have more power. Because the loan is tied to a physical asset, they can take that property back if you default. Falling behind on auto loan payments may lead to repossession of the vehicle by the lender.
Unsecured creditors don’t have this power. They can send your account to collections, sue you in civil court, and damage your credit, but they can’t take your property without a judgment.
Bankruptcy Treatment
In bankruptcy, secured debts are treated differently from unsecured ones. If you want to keep the asset tied to a secured loan, you usually need to either:
Reaffirm the debt: agree in writing to continue making payments.
Redeem the asset: pay its current market value in a lump sum.
Surrender it: give up the asset and eliminate the debt.
Unsecured debts are typically dischargeable. That means once the bankruptcy is complete, you’re no longer legally required to pay them, though there are exceptions (like student loans, recent taxes, and support obligations).
Priority in Chapter 13 Repayment Plans
If you’re filing Chapter 13, debts are paid in a specific order. Secured creditors are prioritized because they have a legal claim on the property. You must pay arrears (past-due amounts) on secured debts to keep the property. Unsecured creditors come last, and they may receive only a portion of the total debt, depending on the debtor’s income, non-exempt assets, and the terms of the repayment plan.
Treatment of Secured Debt in Bankruptcy
Secured debt, like a mortgage or car loan, is tied to property. In bankruptcy, you must decide whether to keep the asset or give it up.
In Chapter 7:
Surrender the asset and discharge the debt.
Reaffirm the loan to keep the property and continue payments.
Redeem by paying the asset’s current value in full.
In Chapter 13:
Catch up on missed payments over time.
Reduce loan balances (cramdowns) on certain assets.
Keep your secured property if you stay current on the repayment plan.
Pennsylvania Exemptions:
If exemptions cover the equity in your property, you can usually keep it. If not, you may need to surrender the asset or switch to Chapter 13.
Treatment of Unsecured Debt in Bankruptcy
Unsecured debts — like credit cards, medical bills, and personal loans — aren’t tied to any property. That makes them easier to discharge in bankruptcy.
In Chapter 7:
Most unsecured debts are wiped out with no repayment required. Exceptions include:
Student loans (in most cases)
Recent tax debts
Child support and alimony
Once discharged, creditors can’t collect from you.
In Chapter 13:
Unsecured debts are paid after secured and priority debts. Many filers repay only a small portion, sometimes nothing, based on income and assets. The rest is discharged at the end of the plan.
Discharging unsecured debt can provide significant financial relief without requiring the forfeiture of personal property.
Why the Difference Between Secured and Unsecured Debt Matters
Knowing the type of debt you have isn’t just helpful — it’s essential to your bankruptcy outcome.
It affects what you keep. Secured debt may put property at risk if payments are missed, whereas unsecured debt does not involve collateral and typically does not result in the loss of assets.
It impacts discharge. Unsecured debt is often erased. Secured debt may remain if you want to keep the asset.
It shapes repayment. In Chapter 13, secured creditors are paid first. Unsecured creditors may get little or nothing.
It guides your legal strategy. Your bankruptcy attorney will use this difference to protect your assets and maximize relief.
Understanding these distinctions allows you to plan more effectively and minimize unexpected outcomes during the bankruptcy process.
Know Your Debt Types Before You File
Bankruptcy can give you a fresh start — but only if you understand how secured and unsecured debts are treated. Secured debts are tied to your property. Unsecured debts are not. This simple difference can determine what you keep, what you lose, and how much debt you erase.
Before you file, take time to review your debts carefully. Knowing where you stand can protect your home, your car, and your financial future.
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