by: Baran Bulkat, Attorney
If a creditor wants to get paid through your bankruptcy, it must file a proof of claim in your case. In bankruptcy, debts are separated into three main categories: secured, unsecured, and priority claims. How a debt will be treated in bankruptcy depends on:
If a creditor has a security interest (lien) on your property, then it has a secured claim. The most common types of secured claims are your mortgage and car loan. In general, a bankruptcy discharge only eliminates your personal liability for a debt. It doesn’t wipe out the creditor’s security interest in the property. If you default on your mortgage or car loan, your lender can still enforce its lien by foreclosing on or repossessing the property.
If you are filing for Chapter 7 bankruptcy, you must indicate whether you want to keep or surrender any assets that secure a claim. If you want to keep the property, you must continue making regular payments on it. If you wish to surrender it, you can give it back to the creditor and your discharge will wipe out any potential liability for a deficiency.
In Chapter 13 bankruptcy, if you want to keep the property, you may be able to pay it off through your Chapter 13 repayment plan or continue making direct payments outside of bankruptcy. If certain conditions are met, Chapter 13 may also allow you to get rid of wholly unsecured junior liens through lien stripping or reduce your loan amount with a cramdown.
Unsecured claims are debts that are not secured by collateral. Unsecured debts are further classified as either priority (discussed below) or nonpriority general claims. Nonpriority general unsecured claims include credit card debt, medical bills, and personal loans.
Most general unsecured claims are fully dischargeable in bankruptcy (student loans are considered general unsecured claims but they are typically nondischargeable). In Chapter 7 bankruptcy, nonpriority unsecured creditors are the last to get paid if there are any nonexempt assets to distribute. In Chapter 13 bankruptcy, the amount you pay general unsecured creditors depends on your nonexempt assets and disposable income. But they usually only receive pennies on the dollar.
Priority claims are nondischargeable unsecured debts that receive special treatment in bankruptcy. The most common types of priority claims include certain tax obligations, alimony, and child support. In Chapter 7 bankruptcy, these debts are paid before general unsecured claims. Further, because they are nondischargeable, you are still on the hook for any remaining unpaid priority debts after bankruptcy.
If you file for Chapter 13 bankruptcy, priority claims must be paid in full through your repayment plan. Because Chapter 13 plans can’t be longer than five years, if you have a substantial amount of priority claims, your plan payment would need to be large enough to pay them off within the plan period.