Friday, August 7, 2015

Bankruptcy - Secured Debt, Unsecured Debt, Priority Debt ... should I care?

When planning a bankruptcy, debtors need to understand the type of debt they have. Usually, debtors have a combination of debts. Most debtors have unsecured debt and some type of secured debt. Some debtors have government debt like taxes, which is classified as priority unsecured debt.  Finally, many people have students loans. The type of debt you have can influence whether you file bankruptcy and what chapter of bankruptcy you might use.

Image courtesy of David Castillo Dominici
Unsecured debt is most commonly with credit card debt, medical bills, personal loans, and debt like that. This is the easiest debt to handle in bankruptcy. Generally, all unsecured debt is discharged in and the debtor is released from paying the debt.

Secured debt is your mortgage and auto loan. This is the type of debt a person has given a property interest, a lien, to the creditor in a specific piece of property like a car, an appliance, or a home. These debts are generally not discharged when you keep the property. If the debtor wants to keep a car for instance, the debtor must be able to pay the loan in full. If the debtor cannot pay the loan and gives up the property, then the amount owed above the value of the property becomes unsecured and can be discharged.

Priority unsecured debt has limitations on discharge-ability. This takes some analysis to determine whether the back taxes can be discharged. Discharging this type of debt is determined by several factors  including when it was access, for what purpose, the taxing authority itself, etc.

Students loans are considered unsecure debt but extremely difficult to discharge. The bankruptcy law distinguishes student loans from other unsecured debt and requires a person to prove "Undue Hardship" before the courts can discharge a student loan. The courts imposed such a high threshold to meet the "Undue Hardship" test that it is nearly for the average debtor to meet the burden.

As a result, the way different type of debt is treated will influence if you file bankruptcy and whether it will be under chapter 7 or 13. If a person has mostly unsecure debt (and make makes the "means test), he or she would probably want to file under chapter 7. People who have secured debt, want to keep the property and is behind on payments will probably need to file under chapter 13. Any combination of debt between these two examples requires a person to sit down with a bankruptcy attorney to help them decide what the benefits and drawbacks are on filing for bankruptcy.

If you want to know more about Mark Medvesky or Wells, Hoffman, Holloway & Medvesky LLP, check out our website at

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