You will be able to understand how bankruptcy works much better once you understand the three main classes of debts. Bankruptcy law does not play favorites with your creditors, except when those creditors are legally different. The most basic way that creditors are legally different is whether a debt is a “general unsecured debt,” a “secured debt,” or a “priority debt.”
With secured debts, the money you owe is secured by collateral. Your obligation to pay is backed up by a lien on one or more of your assets—your real estate or personal property—giving the creditor specific power over that property if you do not pay the debt.
The most common secured debts are vehicle loans and home mortgages, and furniture/appliance/electronics store purchase contracts. Also, a debt which was not secured can involuntarily turn into a secured debt, such as when a creditor files a lawsuit against you and gets a judgment lien against your home.
Secured debts are referred to most directly in Section 506 of the Bankruptcy Code. (See the next blog for information about how secured debts are treated in a “straight” Chapter 7 bankruptcy.)
General Unsecured Debts
An unsecured debt is simply one not backed up by a lien on collateral. The creditor has no right to anything that you own, unless it first gets a judgment against you. “General” unsecured debts are distinguished from “priority” ones, a special set of debts discussed immediately below.
General unsecured debts include most credit cards, medical bills, deficiency balances on repossessed vehicles or other collateral, many personal loans, and numerous other kinds of debts. It’s the “leftover” class of debts—if the debt is not secured (even if it once was) and doesn’t fit within the narrow set of “priority” debts, it’s a general unsecured debt.
In the minority of consumer Chapter 7 cases where the bankruptcy trustee receives some of your assets for distribution to your creditors, Congress has determined that certain special categories of debts should be paid ahead of the general unsecured debts. It has also determined the order, or the “priority,” in which these special debts are to be paid. In a Chapter 13 case, all these priority debts have to be paid in full before your case can be completed.
That priority list, found at Section 507 of the Bankruptcy Code, includes the following most common types of consumer debts, in descending order of priority:
- child and spousal support (c)
- the administrative costs of the bankruptcy case (t)
- certain income taxes (c)
- some other kinds of taxes (s)
If you are struggling with any or all of these three classes of debt, find out your rights and how to get a fresh start. Contact Dallas – Ft. Worth Chapter 7 and Chapter 13 bankruptcy attorneys at Leinart Law Firm today.