Unsecured Debt

When you use a credit card, visit the emergency room, or take out a personal loan, you're typically taking on unsecured debt. There's no property attached to these debts — if you stop paying, the creditor can't just come repossess something. Instead, they'd need to sue you, get a judgment, and then try to garnish your wages or put a lien on property. That process takes time — and bankruptcy stops it completely.

Unsecured debt is the backbone of most consumer bankruptcy cases. Common examples include: credit card balances, medical bills, personal loans, payday loans, utility bills, gym memberships, apartment lease obligations (when surrendering the unit), and some older income taxes that meet specific criteria.

Because unsecured debt has no collateral securing it, it's generally the most dischargeable type of debt in bankruptcy. In Chapter 7, unsecured debts are typically wiped out completely in the discharge. In Chapter 13, unsecured creditors may receive only a fraction of what they're owed (sometimes pennies on the dollar) through the repayment plan, with the remaining balance discharged at the end.

If most of your debt is unsecured — which is the case for the majority of consumer bankruptcy filers — then bankruptcy can be extremely effective. A successful Chapter 7 discharge can eliminate $50,000, $100,000, or even more in credit card and medical debt in just a few months.

The legal protections for unsecured creditors in bankruptcy are intentionally weak. They cannot repossess anything, and they must stand in line behind secured and priority creditors for any distribution. This is why bankruptcy provides such dramatic relief from unsecured debt burdens — the system is designed to give individuals the ability to break free from overwhelming unsecured obligations and start fresh.