All of bankruptcy makes a lot more sense if you know which of your debts fit within which of these three categories of debts. Bankruptcy law generally treats your creditors the same, except when those creditors are legally different. A handy way to describe how creditors are legally different is to say whether a debt is a “general unsecured debt,” a “secured debt,” or a “priority debt.”
Secured Debts
A secured debt is one which is secured by collateral. Your commitment to pay the debt is supported by a right that you give to the creditor over one of your assets—your real estate or personal property—giving to the creditor certain power over that property if you don’t pay the debt—mostly the power to take that property from you.
Examples of common secured debts are vehicle loans and home mortgages, and furniture/appliance/electronics store purchase contracts. Besides voluntarily giving a creditor a right to the collateral at the beginning of the transaction, an unsecured debt can involuntarily turn into a secured debt, like when a credit card creditor files a lawsuit against you and gets a judgment lien against your home.
Secured debts are covered in the Bankruptcy Code primarily under Section 506 .(See my next blog for information about how secured debts are treated in a Chapter 7 bankruptcy.)
General Unsecured Debts
An unsecured debt is simply one not secured by collateral. The creditor has no right to anything that you own, unless it first gets a judgment against you. “General” unsecured debts are all the unsecured debts which don’t fit within any of the classes of “priority” debts discussed immediately below. General unsecured debts are the “leftover” class of debts—if the debt is not presently secured (even if it might have once been) and doesn’t fit within the narrow set of “priority” debts, it’s a general unsecured debt.
Examples of general unsecured debts are most credit cards, medical bills, deficiency balances on repossessed vehicles or other collateral, many personal loans, and many other kinds of debts.
Priority Debts
Congress has decided that in certain circumstances some special categories of debts should be paid ahead of the rest of the debts—ahead of the general unsecured debts. So In the relatively low percentage of consumer Chapter 7 cases where the bankruptcy trustee receives some of your assets for distribution to your creditors, the priority debts are paid ahead of your general unsecured creditors. Congress has also determined the order, or the “priority,” in which these special debts are to be paid. In a Chapter 13 case, all your priority debts have to be paid in full before your case is completed.
The list of priority debts is laid out at Section 507 of the Bankruptcy Code, but includes many kinds of debts which do not apply to consumers. The most common types of consumer priority debts are the following, in descending order of priority:
- child and spousal support
- the administrative costs of the bankruptcy case
- certain income taxes
- some other kinds of taxes
I would be happy to review you debts and advise you about your legal alternatives. I provide a free initial consultation to anyone with questions or concerns regarding a bankruptcy filing. Please reach me at my office by using the contact form here or by calling me at 972-772-3083 to arrange a private meeting. With offices in Rockwall, Texas, I represent clients in Heath, Greenville, Lavon, Wylie, Mesquite and Rowlett.
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