Many times I am asked what is considered unsecured debt for the purposes of a debt consolidation company or other financial institution that is asking for a total of all of what is unsecured debts.  It is actually a very easy to define what is not and what is an unsecured debt simply by one simple rule. We will discuss how you can determine if your debt is secured or not as well as why debt consolidation companies will often only handle your case if you have unsecured debt rather than the other way around.

To determine what is considered unsecured debt simply ask yourself if you would lose anything you currently own if you didn’t pay on it. One common question that people ask me is if their mortgage loan is considered unsecured debt. This may be a confusing question to some because they don’t consider themselves as the owners of a home until they actually finish paying it off, but actually your mortgage is considered secured debt because the home that you now own is on the line if you don’t pay the debt.

As for what is secured and unsecured debt you will find that your credit cards are the largest part of your unsecured debt. A credit card is considered unsecured debt because if you default on your credit card payments then the creditors will attempt to collect on the debt. This is all that they will do because you didn’t secure your credit card with anything when you signed up for it. They cannot come and take your stereo because you didn’t pay your credit card bill. However, if you have a secured credit card, this is another story entirely. They can take your security deposit that you placed when you got the card if you default on your payments.

Other types of unsecured debt that you may have is a personal loan that was not secured by collateral of any kind. This is how you can tell that a debt is unsecured, is if it has no collateral backing it up. Your vehicle is another form of secured debt. If you don’t make your car payments eventually they will come and take your car.  This is why a car loan is considered secured debt and this is a very important distinction when it comes to debt consolidation companies. These companies do not handle secured debt for a very good reason.

The reason that debt consolidation companies don’t handle secured debt is because they have no leverage to use. When you have a credit card bill and are not paying it, then the credit card company has no recourse but to try to collect on the bill. They may try to sue the person that owes the money, but generally they will spend as much as they are owned in attorney’s fees. This is why a debt consolidation company will only handle unsecured debt, because with secured debt the lender can simple repossess the item and the debt consolidation company has no leverage to use against them to get them to reduce the fees or interest payments.

It is truly a difficult thing to dissolve your student loans after filing for bankruptcy. The only way that these types of loans can be wiped away through bankruptcy is if you can prove that they are a substantial hardship on you and your finances and this is a pretty hard thing to do in most cases.

Since the rest of your debts will be taken care of after your have filed for bankruptcy you will have to prove that there is no way you will be able to pay this debt according to the schedule that had been laid out prior.

The next step is a thing called “A Faith Effort” that you will have to prove. This means that you have not tried lying to your creditors and that you are working as much as you can to get the money that you need, yet you are still coming up short.

Also, the judge has a lot to say about it. What can be discharged and what cannot falls directly upon the bankruptcy judge. You might be fortunate to get a judge that allows for discharges and you might get away without having to pay off these loans or at least a part of the loans.

Out of all of your loans and bills, student loans are more flexible and have many options. If you find yourself having trouble paying off your student loans after bankruptcy, let your lender know. You need to tell them exactly what the problems are and they will most likely work with you.

If the thought of contacting the lenders scares you, you need to realize that they will respect you more for coming to them with the truth. And they will be more willing to work with you with different options for you to choose from to pay off your loan.

I need to let you know that a law changed in the fall of 1998 regarding the hardship of repaying student loans that many students use to fall back on. Student loans are no longer discharged in any chapter of bankruptcy unless you can prove that repaying the loan creates an undue hardship on you or your family.

Now a hardship usually requires showing that you cannot provide a minimum standard of living for you and your dependents if you have to repay the loan now. Like we talked about above, some courts will discharge part of the loan with proof that repaying would truly be that kind of a hardship.

Student loans can sometimes be unenforceable due to school closures, fraud, etc. Chapter 13 can provide a way to cure defaults on student loans, or to pay them off over the course of the plan.

Now some federal insolvency courts are allowing debtors (students with loans) to reclassify when filing for bankruptcy or chapter 13. This allows the debtor to pay more money to repay the loan rather than paying off the unsecured debts.

Student loan bankruptcy is no doubt changing and is in trouble. It is no longer possible to reduce your debts as it was in the past. Also, you can find out much more information regarding this subject by checking out the many sites available on the web, or calling your lender right away and explaining what is happening.