The Different Types Of Debt In Bankruptcy
It is a common misconception that filing for bankruptcy automatically erases all debt. There are a number of factors that determine which debts will be discharged and which still need to be paid. One of these factors is the type of debt. The type of debt determines how that debt will be treated.
In bankruptcy, there are 3 categories for debt:
- Secured DebtPriority
- Unsecured Debt
- Non-Priority Unsecured Debt
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1. Secured Debt
Secured debt is any type of finance or loan that is backed by collateral. The collateral is an asset that stands as security for the loan that can be repossessed by the lender in bankruptcy to reclaim the outstanding debt. Examples of secured debt include:
- A home loan or mortgage where the property is collateral or security for the loan.
- Car finance where the vehicle stands as collateral or security for the loan.
- Any other types of personal loans that are secured by an asset or item of value.
Secured credit card debt.
Under Chapter 7 Bankruptcy, there is the option to surrender the collateral to the lender and have the remainder of the outstanding debt discharged. If the asset is not to be surrendered, monthly payments to the lender must continue to be made. If these payments are unaffordable or the repayments are too far behind to catch-up, the asset should be surrendered.
Under Chapter 13 Bankruptcy, secured debts can form part of the Chapter 13 payment plan.
2. Priority Unsecured Debt
Unsecured debt is not backed by any collateral. Some types of unsecured debt are given priority under bankruptcy laws. This priority is decided upon whether or not repayment of the debt will be beneficial to society as a whole. These types of debts include:
- Fines, penalties, fees or any other amount owing to a government agency.
- Student loans that are government funded or owed to an institution that is affiliated to the government.
- Excess in benefit overpayments.
- A 401k or other type of tax-advantage retirement plan.
- Damages that are due to a third party where malicious or willful intent caused an injury or losses.
- Child support, spousal support and alimony (including back payments).
- Taxes that are owed to the federal, state or local government.
Under Chapter 7 Bankruptcy, priority debts will receive payment from the sale of assets before other creditors. If the amount from the sale of assets is insufficient to cover these debts, they will not be discharged. Payments will need to continue to be made.
Under Chapter 13 Bankruptcy, full repayment of priority unsecured debt must form part of the payment plan.
3. Non-Priority Unsecured Debt
These are the debts that can be discharged under bankruptcy. Non-priority unsecured debt includes:
- Personal loans
- Private student loans
- Credit card debt
- Medical bills
- Utilities that aren’t considered a priority debt
- Any other debts that are unsecured and are not considered by the courts to be a priority.
These lenders are the last in line to receive payment from the sale of assets after priority debts have been paid. Any outstanding debt will typically be discharged. Under Chapter 13 Bankruptcy, non-priority unsecured debts do not have to form part of the payment plan.
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