How Is an Unsecured Cash Loan Treated in Bankruptcy?

What happens to unsecured cash loans in bankruptcy?

Hint: NEVER make an unsecured cash loan to anyone, if there is the slightest chance they'll declare bankruptcy.

What Happens to Debts in Bankruptcy?

Bankruptcy gives debtors a second chance. It does so by paying creditors whatever the debtor can afford--which may not be much!--and then discharging, or canceling, the remainder of any debts. Depending on the type of bankruptcy, these payments are funded either by liquidating the debtor's assets (Chapter 7) or through their income stream, such as salary or wages (Chapter 13). Since people only declare bankruptcy when they have more debt than they can pay, odds are that their assets or income will only pay creditors dimes, or perhaps only pennies, on the dollar.

Some Debt Is More Equal Than Other Debt

Secured debt, which is debt that has property serving as collateral (e.g. mortgage or car loan), has some protection in bankruptcy: the creditor has the right to foreclose or repossess. The lender may not get the full value of the loan, but at least it can get the property.

Also, some debt has a higher priority than other debt and must be paid first.

After secured debts are taken care of--that is, after the debtor has made arrangements to keep paying them, if he or she wants to keep the property--and after any higher-priority debts are paid, then lower-priority unsecured debts share in whatever is left.

Unsecured Cash Loans Are Lowest Priority

Consumer debts, like credit cards, and unsecured cash loans are among the types of debt that have the lowest priority. By the time they are to be paid, there is probably very little--if anything!--left from the original money available for creditors. Since there probably wasn't that much to begin with, low-priority unsecured debtors are often lucky to receive anything.

How an Attorney Can Help

If you're the debtor, an attorney can help you plan and file your bankruptcy. If you're contemplating lending money to someone, an attorney can help you establish a security interest in property or assets, to protect you in the event of bankruptcy.