An individual considering filing bankruptcy due to overwhelming debt may have secured and unsecured creditors, and it may be helpful to know how these are distinct and what rights they have during the bankruptcy proceeding.
A secured creditor is defined as a creditor that has a secured interest in the property and can use that property as collateral in the case of default. Houses or cars that are being purchased with periodic payments are examples of properties that secured creditors typically hold as collateral. In the case of bankruptcy, these secured interests do not go away, and such property may be taken to repay outstanding debts. Alternatively, debtors undergoing bankruptcy proceedings may be able to reaffirm the debt and continue making payments, thus avoiding their property being seized.
An unsecured creditor has no such claim over the debtor's property, and has made a loan to the debtor without the ability to seize collateral in the case of default. In Chapter 7 bankruptcy proceedings, some non-exempt possessions of the individual may be sold off to repay unsecured creditors.
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