How “Unsecured” Debt Can Become “Secured” Debt

December 17th, 2009 by Reed Allmand

One of the most common types of unsecured debt is credit card debt. However, sometimes credit card debt can transform into secured debt giving it a higher priority for repayment during bankruptcy.  How does that work?

When a debtor fails to repay their credit card debt, the credit card lender will eventually file a lawsuit against the debtor. While the debtor will have an opportunity to go to court and argue his/her case, the usual outcome of a credit card company lawsuit is that the creditor wins a judgment against the debtor, giving the lender new power to get the money they are owed.  With a judgment, a creditor can garnish bank accounts, wages and place a lien on real estate or other property owned by the debtor making it impossible for the debtor to sell the property without paying the debt first.  But another important change that takes place after a credit card lender wins a  judgment is that the debt owed becomes secured.

Because of its newfound secured debt status, once a debtor files Chapter 13 bankruptcy, the “secured” credit card debt gains priority over other unsecured debts. In Chapter 13 bankruptcy, secured claims are paid first and in full, before any unsecured creditors.  Unfortunately for the debtor, this could mean a larger monthly payment throughout their Chapter 13 bankruptcy. To avoid this problem, debtors facing a creditor lawsuit should contact a bankruptcy attorney. If the debtor files bankruptcy, the “automatic stay” will stop the lawsuit and any other collections activities by creditors against the debtor preventing the creditor from winning a judgment and transforming their unsecured debt into secured debt.