A key part in understanding how
bankruptcy works is learning the differences between the three types of debt –
secured, unsecured, and priority claims – and how each is treated
under the particular type of bankruptcy you have decided to file. Most
debtors choose either a
Chapter 7 bankruptcy – commonly known as a liquidation bankruptcy – or a
Chapter 13 repayment plan bankruptcy.
Each type of bankruptcy treats each type of claim differently.
Secured debt is debt that is secured by a physical thing, known as collateral,
in which the creditor holds a lien, or the right to claim possession of
in the event of a default on a loan. Secured debt is commonly used for
major purchases such as vehicles or homes.
In the event of bankruptcy, the debtor is relieved of past liability for
the secured item, but is still responsible for ensuring the creditor retains
their interest in the secured item.
What this means in simple terms that, if you file for Chapter 7, you will
not be responsible for past missed payments, but the lien holder can repossess
or seize the property that secures the debt if you do not pay the remaining
balance owed on the debt.
If you choose to keep the property, you will still be responsible for payments
going forward and can default on payment of the debt. If this happens,
the lien holder can foreclose on the debt and force you to surrender the
property. However, you can also choose to simply surrender the property
to the lien holder and discharge the debt as part of the larger bankruptcy
Under Chapter 13 bankruptcy, payment of the secured loan can be consolidated
into the bankruptcy payment plan. Alternately, you can chose to hold the
secured debt outside of the bankruptcy and merely continue to make regularly
scheduled payments until the debt is paid off.
An unsecured claim is simply debt which has no collateral. Unsecured debt
is generally divided into two classifications: priority and non-priority
claims. Such things as personal loans, credit card debt and medical bills
are often classified as non-priority claims and are generally fully discharged
in a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, non-priority claims
are generally integrated into the repayment plan.
Priority claims, as the name implies, are considered to be of higher importance
than non-priority claims and are the first to be paid. Alimony, child
support, and tax debt are three types of priority claims
In Chapter 7 bankruptcy:
- Priority claims are paid first,
- The balance of the priority claim debt going forward is not considered
- The debtor is still liable for the debt.
For instance, if you declare Chapter 7 bankruptcy and are liable for child
support payments, then your back payments will be first in line for payment
from the proceeds of your liquidation and you will still be required to
continue paying your child support obligation going forward.
If you are filing Chapter 13 bankruptcy, full payment of all priority claims
will need to be factored into your debt repayment plan. These debts will
need to be fully paid off during the term of the repayment plan. This
means that, if you have a large number of priority claims, your payments
into the plan may be substantial.
Hire a Lawyer Who Understands Bankruptcy Law
Knowing how each type of claim is treated is vitally important to anyone considering bankruptcy.
Understandable bankruptcy can be a daunting task without the guidance of
an experienced team of legal professional to help guide you through the process.
Contact us today if you think bankruptcy is right for you.