General unsecured claims receive the least favorable treatment in bankruptcy. General unsecured claims are debts which are:
- Not secured by collateral; or
- Unsecured debts which are not afforded priority treatment under the Bankruptcy Code.
The most common general unsecured claims are:
- Credit card debts;
- Medical bills; and
- Signature/Personal loans.
Treatment of General Unsecured Debts in Chapter 7 Cases
In Chapter 7 cases, general unsecured debts will be discharged. However, the Bankruptcy Code specifically identifies certain unsecured debts which are not dischargeable. These debts are typically referred to as priority unsecured debts and include:
- Domestic support obligations, such as child support and alimony;
- Property settlements pursuant to a divorce decree or other family law order;
- Certain tax debts;
- Court ordered fines and restitution; and
- Debts incurred in connection with a DUI/DWI.
Additionally, student loans are not dischargeable in bankruptcy. However, a debtor who meets certain criteria may be entitled to a hardship discharge of student loans.
Treatment of General Unsecured Claims in Chapter 13 Cases
In Chapter 13 cases, allowed general unsecured claims are paid only after allowed secured claims and allowed priority unsecured claims have been paid. The debtor’s Chapter 13 plan must allow for full payment of all principal, interest, and penalties as of the date the bankruptcy was filed on all allowed secured claims and allowed priority unsecured claims.
Whatever is left after the allowed secured claims and allowed priority secured claims have been paid, will be distributed for payment of allowed general unsecured claims on a pro rata basis. Depending on the composition of the debtor’s Chapter 13 plan and how much he can afford to pay, general unsecured creditors with allowed claims may be paid as little as nothing or as much of 100% of what they are owed.
What is an Allowed Claim?
In Chapter 13 cases, creditors who wish to participate in and be paid through the Chapter 13 plan must file a Proof of Claim by a specified date. If a creditor does not file a Proof of Claim, it will not be entitled to participate in the Chapter 13 plan.
The Proof of Claim must specify:
- The type of debt;
- Whether the debt is a secured, priority unsecured, or general unsecured debt;
- The amount of the debt;
- The interest rate;
- The amount of accrued interest, late fees and penalties as of the date the bankruptcy was filed; and
- The total amount due as of the date the bankruptcy was filed.
Creditors must attach to the Proof of Claim any documentation evidencing the debt.
A debtor has a limited amount of time to object to Proofs of Claim filed by his creditors. If no objection is filed, the claim will be classified as an allowed claim.
Getting Legal Help
If you have questions about how your debts will be classified in a bankruptcy case, you should schedule a consultation with a qualified bankruptcy attorney. A bankruptcy attorney will review your debts and advise you how they will be treated in bankruptcy.