The Bankruptcy Law Clinic Blog

Sunday, March 17, 2013

Different Types of Debt and How They’re Treated in Bankruptcy


Many people have questions regarding how their debts will be handled after filing for bankruptcy and the answer depends on the type of debt that is owed.  Most debt falls under the following categories:  secured debt, general unsecured debts and priority debts.  Each will be handled slightly differently in your bankruptcy. 

Secured Debts

A secured debt is a debt that is secured by collateral.  These types of debts include car loans, mortgages or any other debt when there is property that can be repossessed or taken if the debt isn’t paid.  In most cases, if you want to keep a secured debt, you can do so while still wiping out your other debt. Converselly, if you are ready to walk away from your house or car, you can do that as well.When a secured debt is handled in bankruptcy, the trustee will consider the debt’s collateral versus how much is owed.  Also, some debts can be partially secured and partially unsecured, such as when you owe more on a home or vehicle than it is worth. 

General Unsecured Debts

Any debt that is not secured by collateral is known as an unsecured debt.  Most credit cards, personal loans, payday loans and medical bills fall into this category. 

Priority Debts

Priority debts are debts that receive priority because the law treats them as being more important than unsecured debts.  These debts usually include child and spousal support; the administrative costs of the bankruptcy case, including trustee fees and attorney fees; wages and other forms of compensation owed to employees if it is a business filing for bankruptcy; certain income taxes, and some other kinds of taxes.

How Each Category Of Debt Is Handled In A Bankruptcy

In a Chapter 7 bankruptcy, if assets are liquidated, the debts that are considered high priority are paid first; in many cases, the unsecured debts aren’t paid at all, or are only paid partially. 

In a Chapter 13 bankruptcy, the repayment plan created by your trustee will have all priority debts paid before the case is completed. 

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