One way to categorize creditors when filing for bankruptcy is as secured or unsecured. The distinction between them can be important for both your creditors and yourself:
- Secured creditors have a lien on your property that they can use as collateral if you are unable to repay your loan. Common examples include home loans, car loans, and tax liens;
- Unsecured creditors do not have a lien that they can claim on your property. Credit card debt, payday loans, and medical bills are often categorized as unsecured debts; and
- Some unsecured debts are priority debts that must be paid in full, regardless of bankruptcy protections. Child support, spousal support, student loans and some tax debts are common examples.
Secured creditors generally receive priority in being compensated during bankruptcy proceedings. How creditors are compensated depends on whether you are filing for Chapter 7 or Chapter 13 bankruptcy.
Secured Creditors in Chapter 7
If you want to keep the property, you can reaffirm your debt, and keep making your payments just like you never filed a bankruptcy. Otherwise, you can surrender your property, not make the payments and not have any liability for the debt.
Unsecured Creditors in Chapter 7
Unsecured creditors generally do not receive anything and the debts are discharged. However, in those rare instances that there are assets in a case that are not exempt, these creditors receive whatever money is left over from the sale of non-exempt properties after priority debts are paid. However, the priority debts described above are not discharged.
Secured Creditors in Chapter 13
One of the benefits of a Chapter 13 bankruptcy is the repayment plan for your secured obligations that are in default., You can keep your property from secured creditors by agreeing to repay your defaulted debt over a period of three-to-five years. You must stay current on your regular monthly payments. Otherwise, your secured creditors may be able to ask the Court for relief from the bankruptcy protection and foreclose on your home or repossess the collateral that secures the loan.
Unsecured Creditors in Chapter 13
You must include priority unsecured debts in your Chapter 13 repayment plan. Other unsecured creditors can be repaid in full or in part. Unsecured creditors must receive at least the same value as what they would have received from the sale of nonexempt properties in Chapter 7 bankruptcy. There is a formula that determines how much your unsecured creditors must be paid.
A Frisco, Texas, bankruptcy attorney at The Page Law Firm can discuss your options for repaying your creditors and protecting your property. Schedule a free consultation by calling 214-618-2101.