When Does Unsecured Debt Become Secured?

June 1st, 2009 by Reed Allmand

When discussing “unsecured” debt most debtors are speaking of credit card debt. But unsecured debt could also include a personal loan, loans from friends/family, unpaid rent etc.  Basically, unsecured debt is any debt that is not attached to some type of property.  Unsecured creditors do not have the right to seize a debtor’s property once the debtor has defaulted on the loan. However, unsecured debt can become secured debt through a judgment won in a lawsuit.  A creditor who has been unsuccessful in collecting a debt may choose to file a lawsuit against the debtor and secure a judgment.  Once that happens the unsecured debt becomes a secured debt which will allow the creditor to seize certain property such as wages or money in a bank account.

If a debtor filing for Chapter 13 bankruptcy has a judgment against him/her, that creditor will be treated as a secured creditor. What this means is that the creditor with the judgment will be paid before unsecured creditors during Chapter 13 bankruptcy. The creditor with the judgment may also have a “lien” which could encumber the sell of assets during bankruptcy.  Sometimes a debtor can work with a bankruptcy attorney to void the lien of “judgment creditor” but of course this may make the bankruptcy case more complicated.  To avoid problems such as this, a debtor who has a pending lawsuit and who is considering bankruptcy, should probably speak with a bankruptcy attorney before a judgment is won by the creditor. A bankruptcy attorney can work with the debtor, helping him/her to take the appropriate actions in relation to the lawsuit and their future bankruptcy case.