General Rules For Secured & Unsecured Debt and Dischargeability of Priority and Non-Priority Unsecured Debt
What Is an Unsecured Debt Versus a Secured Debt?
There are two main types of debt in Bankruptcy. These are unsecured debts and secured debts. Unsecured debts are all debts that are not backed by any form of “collateral”. The most common form of unsecured debts includes credit card debts, medical bills, and personal loans.
Secured debts on the other hand are debts that are backed by some form of collateral. The most common form of secured debts are car loans on a new or leased car, or a mortgage on a home.
Although Secured debts are not dischargeable in a Chapter 7 bankruptcy proceeding, other options for debt relief often exist for certain secured debts. A qualified bankruptcy attorney will also assist you in determining how to best “navigate” debt relief for various secured debts in a Chapter 7 bankruptcy proceeding.
Which Unsecured Debts Are Dischargeable in Bankruptcy?
To determine if an unsecured debt is dischargeable in a Chapter 7 bankruptcy, one must go one step further and determine if the unsecured debt is a priority or a nonpriority debt. For reference, most nonpriority debts can be discharged in a Chapter 7 bankruptcy proceeding. Again, however, proper advice from a qualified bankruptcy attorney is critical as priority unsecured debts are not dischargeable in a Chapter 7 bankruptcy proceeding.
Why Priority Debts Are Not Dischargeable in Bankruptcy?
Priority debts are unsecured debts which although not secured by any form of “collateral” are nonetheless still treated as being “non-dischargeable” in bankruptcy. Priority debts generally include either money owed to the government, or other forms of debts that the Bankruptcy Code has expressly prevented from being discharged (i.e.: Student loans).
Examples of Unsecured Priority Debts?
As you will still be responsible for any remaining balance due on a priority unsecured debt even after you receive your bankruptcy discharge; it is critical to have a qualified bankruptcy attorney assist you in determining what unsecured debts qualify as either priority debts, or non-exempt debts for “other reasons”.
Most Common Types of Non-Dischargeable Priority Debts:
- Child support, spousal support payments, and/or arrears;
- Certain income taxes;
- Payroll and sales taxes;
- Criminal fines including criminal restitution payments;
- Overpayment of government benefits; as well as
- Student loans (Not a priority debt but still not dischargeable under the Bankruptcy Code)
Determining and Discharging of Nonpriority Debts in Bankruptcy
The most common form of nonpriority unsecured debt is often credit card, medical bill, and personal loan debt. For these types of nonpriority unsecured debts, a Chapter 7 bankruptcy will often provide you with a complete discharge of the debt, as well as prevent a creditor from obtaining a judgment against you!
Paying Priority and Nonpriority Claims in a Chapter 7 Bankruptcy
Unsecured Priority debts must be paid ahead of all other debts in a bankruptcy proceeding. If you have priority debts in a Chapter 7 and the trustee has recovered money to repay creditors (often not the case), the priority creditors must be paid first.
If there isn’t enough money to repay priority debts, nonpriority debts will not be paid at all. Only when there is money left over after priority debts are paid in full, will any monies be distributed pro rata to nonpriority creditors. Again, the services of a qualified bankruptcy attorney are critical in the process of assisting you in determining how to maximize debt discharge options.
Example: Bill files for Chapter 7 bankruptcy and owes $20,000 in back child support plus another $30,000 in credit card debt. Bill also has approximately $15,000.00 in non-exempt assets. In such a case, the Chapter 7 trustee will usually sell Bill’s non-exempt assets (unless some other arrangement can be worked out between Bill’s qualified attorney and the Trustee), plus the Trustee will also charge Bill for the Trustee’s fees and costs for selling the non-exempt property.
Let’s say the Trustee also obtains $15,000 from the sale of Bill’s non-exempt assets, and the Trustee’s fees and costs for selling the non-exempt assets add up to $3,000. The remaining $12,000 is then paid toward the back-child support (i.e.: unsecured priority claim), and the entire $30,000 in “non-priority” credit card debt is discharged. Bill will still owe $8,000 for the balance of the child support priority debt/claim after the bankruptcy is over.
Bankruptcy is a legal process to help debtors (people who owe money) get relief from the debts they cannot pay and, at the same time, help creditors (people who are owed money) get paid from whatever property or assets the debtor has that he or she does not need to live. Deciding to file for bankruptcy is a very tough decision. You may be feeling overwhelmed and bankruptcy seems like the only option. But think about the decision carefully because it can really affect you for a long time. Also, bankruptcy does not remove all debt, and there are certain types of debt that cannot be discharged (eliminated) in bankruptcy.
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