In general, debts get broken down into three categories: secured debt, priority unsecured debt, and non-priority unsecured debt. Determining whether a debt is secured, priority, or non-priority unsecured can be complex, and depend not only on interpreting federal bankruptcy statutes but also how federal bankruptcy courts have treated particular kinds of debts. An experienced Cleveland bankruptcy lawyer can help you understand how your debts would be categorized and treated in a Chapter 7 or Chapter 13 bankruptcy, and help you make an informed decision about how to move forward to get your debt under control.
Secured debt is debt that is backed by collateral that a creditor could take if the debt is not paid, or to put it another way, if you have a lien against any property you own, that would be a secured debt if you file bankruptcy. A lien may be voluntary, such as a lien against your home or your car while you’re still paying for it. Liens also can be involuntary, such as when someone gets a judgment against you and places a lien against your property.
Some examples of secured debt include:
- Home mortgages
- Car loans
- Personal loans with collateral
- Real estate tax liens
- Civil lawsuit judgment liens
A lien has to be perfected for the debt to be a secured debt in bankruptcy. Perfecting means that the creditor has gone through a legal process of providing notice to others that the creditor has an interest in the property. Perfecting a lien could include actions such as recording the lien with a county agency when it affects real property such as a house, noting it on your car title with BMV, or by filing a financing statement when the lien is for collateral against personal property you own.
If a creditor has obtained a judgment against you in a civil lawsuit and taken the additional step of perfecting a lien, then the judgment would be a secured debt. Otherwise, it may be treated differently.
Because secured debt is backed by property that you own, it must be repaid if you want to keep the property. If you file Chapter 7, that typically means you either need to be current on the payments or have the means to catch up if you’re behind. If the payments are more than you can afford, or if you are significantly behind, you may have the option to surrender the property to the creditor and then have any remaining debt for the mortgage, car loan, or personal loan discharged through bankruptcy.
If you file a Chapter 13, you may be able to have your payments on the secured debt made through your Chapter 13 plan, and that protects your property from foreclosure or repossession as long as you’re paying into the plan. Additionally, you may be able to have any past due payments spread out over time through the plan. In most cases, a car loan or a personal loan would be paid in full by the end of your plan. Most people still have a mortgage balance at the end of their Chapter 13 plan and need to be in a position to resume normal payments once the Chapter 13 is over.
Similar to secured debts, creditors with priority unsecured debts must be paid in full even though they hold no collateral. Most priority unsecured debts are debts to the government. Obligations to a former spouse or to your children also are priority unsecured debts.
Some examples of priority unsecured debt include:
- Taxes (read more about what happens to tax debt when you file for bankruptcy)
- Child support or spousal support arrears
- Criminal fines
- Repayment of government benefits
- Judgment from a personal injury lawsuit in which you were driving while under the influence of drugs or alcohol
If you file for Chapter 13, your priority unsecured debt should be paid in full through your Chapter 13 plan, but that allows you to spread it out over a period of 3 to 5 years, which can make paying this type of debt more affordable for you, and at the end of your plan you’re caught up on your taxes or child support payments.
In Chapter 7, if you have assets to sell then priority unsecured debts get paid before debts such as credit cards or medical bills. If you don’t have assets, many priority debts cannot be discharged or have more stringent requirements for discharge, and you may still owe them once your bankruptcy is complete.
Non-priority unsecured debts are pretty much everything else that isn’t a secured debt or a priority debt. The vast majority of non-priority unsecured debts can be discharged through either a Chapter 13 or Chapter 7 bankruptcy, and you won’t owe the creditor anything once your bankruptcy is finished. In Chapter 13, non-priority unsecured creditors may only be paid a small fraction of what you owe, and any remaining debt is discharged when your plan is complete.
Some examples of non-priority unsecured debt include:
- Credit cards
- Medical bills
- Personal loans without collateral
- Past due utility payments
One noteworthy type of non-priority unsecured debt is a student loan. Even thought student loans get categorized with debts such as credit cards or medical bills, there are special rules for how student loans are handled in bankruptcy, and it is exceptionally difficult to get student loans discharged. In the vast majority of cases, you’ll still owe your student loans after a bankruptcy.