In bankruptcy, how debts, also referred to as claims, are paid depends on their classification. Secured claims have the highest priority and are paid first. Priority unsecured claims have the next highest priority and are paid next. General unsecured claims have the lowest priority and are paid last.
What is a Secured Claim?
A secured claim is any claim that is secured by collateral. Examples of secured claims include:
- Auto loans;
- Auto title loans;
- Judgment liens; and
- Mechanic’s liens.
In a Chapter 7 bankruptcy, a debtor may make voluntary payments on certain secured claims as long as at the time the bankruptcy is filed, the loan payments are current. If the loan payments are delinquent, the debtor has three options:
- Reaffirmation; or
In Chapter 13 cases, a debtor’s Chapter 13 plan must set forth how secured claims will be paid. In the case of a mortgage, only the mortgage delinquency will be paid through the Chapter 13 plan. The balance owed on all other secured debts will usually be paid in full through the Chapter 13 plan.
What is a Priority Unsecured Claim?
The Bankruptcy Code treats the following unsecured debts as having priority over other unsecured debts.
- Domestic Support Obligations;
- Administrative expenses of the bankruptcy case;
- Unpaid wages;
- Unpaid contributions to employee benefit plans;
- Certain tax debts;
- Consumer layaway deposits of up to $2,425 each;
- Court ordered fines and restitution; and
- Claims for death or personal injury resulting from a DUI/DWI.
In a Chapter 7 case, most priority unsecured claims will not be discharged. In a Chapter 13 case, priority unsecured claims usually will be paid in full before general unsecured claims.
What is a General Unsecured Claim?
General unsecured claims are all other unsecured debts, such as:
- Credit card bills;
- Signature/personal loans;
- Medical bills; and
- Student loans.
In Chapter 7 cases, general unsecured debts will be discharged. The exception to this rule is student loans. Student loans are not dischargeable in bankruptcy. However, in very limited circumstances a debtor may receive a hardship discharge of student loans.
In Chapter 13 cases, whether general unsecured claims will be paid anything depends on the composition of the Chapter 13 plan and whether the debtor has sufficient net disposable income to pay such claims. It is not uncommon for general unsecured creditors to receive a small fraction of what they are owed. Whatever portion of the general unsecured claims which has not been paid upon completion of the Chapter 13 plan by the debtor will be discharged.
However, the balance remaining on student loans at the end of the Chapter 13 case will not be discharged and remain the responsibility of the debtor.
Getting Legal Help
One of the most important functions a bankruptcy attorney serves is to ensure that his client’s creditors are not misclassifying their claims in order to receive better treatment under the Bankruptcy Code. A qualified bankruptcy attorney will review all proofs of claim filed by creditors and file the appropriate objections if necessary.