Understanding Bankruptcy: Secured, Priority, and Unsecured Debt
Filing for bankruptcy is a big move that can be potentially life-changing if you don’t prepare accordingly. Having all of the financial documents ready for your case is an important step in successfully filing for bankruptcy if you hope to reduce your debt. You will need to provide information on the type of debt you hold, and the creditors to ensure that you are prepared for proceedings.
Here is some important information to consider when you are filing for bankruptcy:
Type of Debt Matters
The type of debt you have going into bankruptcy will determine your options. There are three types of debts:
- Secured debts
- Priority unsecured debts
- Non-priority unsecured debts
Secured debts are debts that have collateral held against them such as a mortgage or car loan. These debts must be paid off or have the collateral property surrendered to the creditor.
Priority unsecured debts also must be paid off. These are usually government fines, taxes, or other legal fees which you are required to pay.
Non-priority unsecured debts don’t necessarily have to be paid back and can be reduced to minimal charges depending on the filing.
While each of these examples of debt is different, the primary differentiator is how they are filed.
In a bankruptcy case, you can file Chapter 7 or Chapter 13, which can impact how the case is handled if you qualify. For instance, secured loans will need to be repaid, but if they are filed under Chapter 7 you might have the option to surrender your property or pay up to the current amount owed, which will let you keep your property.
Each debt type is affected differently by the Chapter 7 and Chapter 13 rules, but both can significantly reduce or even dismiss the debt you have, depending on the situation.
Secured Debt Versus Unsecured Debt
Secured debts are loans or debts that were backed by some sort of collateral. If you don’t pay the debt back, the collateral is collected by the creditor. For example, if you put a lien against your car that is a secured debt in a bankruptcy case. Liens against your property can be voluntary liens or involuntary liens. Voluntary liens include things such as car loans or house mortgages and involuntary liens can happen when someone gets a judgment against you and places a lien against something you own, such as your house or car.
Example of secured debts:
- Car loans
- Personal loans w/collateral
- Civil lawsuit liens
- Real estate tax liens
When going through bankruptcy with a secured debt, a lien will have to be perfected. Perfecting a lien happens when the creditor has legally notified you and others that they have an interest in the collateral. This can be done by marking your car title, recording it through an agency, or through a financial statement.
Unsecured debt comes in two forms: priority unsecured debt and non-priority unsecured debt.
Priority unsecured debts are usually government debts. Similar to secured debts, you must pay these debts back in full despite having no collateral against them.
Examples of priority unsecured debts:
- Child support or alimony
- Repaying government benefits
- Personal injury case payments
Non-priority unsecured debts constitute pretty much every other kind of debt outside of priority unsecured debts, secured debts, and student loans. These debts can oftentimes be discharged under either Chapter 7 or Chapter 13, meaning you won’t owe the creditor anything after the bankruptcy case is over.
Examples of non-priority unsecured debt:
- Credit cards
- Medical bills
- Utility payments
- Personal loans
Consolidate and Plan Your Repayment
Having a plan to tackle your debt before you reach the point of bankruptcy is a must. At Western Shamrock, we specialize in giving you the tools you need to consolidate your debt. Contact us today to get a head start on your financial planning.