Understanding Secured, Unsecured, and Priority Claims

Claims in bankruptcy are separated into three primary categories: secured, unsecured, and priority claims.  The type of claim a debt is determines how it is treated in bankruptcy.  Understanding secured, unsecured, and priority claims is not difficult.  Chapter 7 and Chapter 13 are the types of bankruptcy filed by most individual debtors.  Whether a debt is discharged or paid depends on whether it is secured with collateral or is dischargeable.

Secured Claims

Debt that is secured with collateral, such as a car or house, is considered a secured claim.  How secured debt is handled depends on the type of bankruptcy that is filed and whether the debtor wants to keep the property.  In a Chapter 7, secured property may be surrendered and the debt treated as unsecured, or the property may be kept and paid for.  The same options are available in a Chapter 13, but the debt may be paid within the payment plan or directly if the property is retained.  Also, in a Chapter 13 payment plan, the value of the property may be repaid instead of the actual amount owed, depending on how long the debtor has had the property.

Unsecured Claims

Unsecured claims are those that are not secured by collateral.  They include credit cards, medical bills, and signature loans. In a Chapter 7 bankruptcy, unsecured debt is discharged, or absolved, if the debtor does not have any non-exempt property.  Non-exempt property, such as boats and RV’s, are not protected through the bankruptcy.  Any non-exempt property is appropriated by the trustee, sold and the funds distributed to creditors.  However, unsecured debt is last in line to receive funds behind priority debt as set forth by the bankruptcy code.

Priority Claims

Priority claims are those that are non-dischargeable and include some taxes, child support, alimony, and student loans.  These claims are not wiped out in a Chapter 7 or 13.  If the debtor files a Chapter 13, priority debt has to be paid in the plan, with the exception of student loans. Priority claims paid in the plan are repaid at 0% interest. (See also Minimum Amount of Debt Needed for Bankruptcy).

When to Talk to a Lawyer

Bankruptcy is a very concise area of law which may require the guidance of a licensed attorney.  If you are unsure about how to complete the documents to file bankruptcy successfully, consider seeking the advice of a lawyer that specializes in bankruptcy.  Their knowledge is invaluable.