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Bankruptcy Priority Payouts Explained: Priority, Secured, Unsecured Debts Are Not Equal

Bankruptcy Priority Payouts Explained: Priority, Secured, Unsecured Debts Are Not Equal

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

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 discharge.

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.

Unsecured Debt

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

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 dischargeable, and
  • 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.