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Photo of attorneys Shelley Slafkes and Bruce Levitt
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Understanding Debt Classifications in Bankruptcy

On Behalf of | Mar 26, 2018 | Bankruptcy Basics, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy

Bankruptcy proceedings are often intense and incredibly complex. For the uninitiated, the terms that attorneys and judges throw around often sound like a different language. Nevertheless, if you are interested in learning more about bankruptcy, it is important to learn some of the fundamental concepts so that you can make well-informed decisions.

Bankruptcy is about relieving your debt obligations. There are three categories in which bankruptcy courts will classify debt: (1) priority claims; (2) secured claims; and (3) unsecured claims.

Priority Claims

We find that many people have a misconception that all debts are eliminated (discharged) through bankruptcy. In reality, there are certain debts that cannot be wiped out through Chapter 7 or Chapter 13 bankruptcy. These are “priority” debts.

Priority debts encompass debts protected by law and public policy, and may include:

– Domestic support obligations, including court ordered child support or alimony;

– Trustee and administrative fees;

– Qualifying government tax obligations;

– Certain personal injury or wrongful death judgments;

For purposes of Chapter 13, priority debts must be included in the payment plan and paid throughout the proceedings. For Chapter 7, these debts survive and continue following the discharge order.

Secured Claims

Secured claims are debts that are tied to collateral. This collateral belongs to the creditor if the borrower defaults on the loan payments. It is therefore important that these claims are adequately addressed through bankruptcy. The most common examples of secured claims include home mortgages, auto loans, court-ordered liens against property, and unpaid property tax obligations.

While Chapter 7 bankruptcy will discharge a borrower’s personal liability for a debt, the discharge does not generally impact the creditor’s lien on the property that serves as collateral. While certain junior liens may be discharged by a bankruptcy court, creditors typically have the continued powers of foreclosure or repossession if timely payments do not continue after the discharge order is entered.

Unsecured Claims

Unsecured claims are those which are not tied to collateral, and which are not protected as “priority” debts. Thus, these are debts that can be successfully discharged by a bankruptcy court. This includes credit card debt, unsecured personal loans, unpaid rent, utility bills, and court-ordered obligations that do not order a lien or garnishment. Significantly, medical bills-which can be exorbitant-are also unsecured debt that can be discharged through bankruptcy proceedings.

Let Levitt & Slafkes, P.C. Work For You

You need legal help if you are trying to navigate the complexities of bankruptcy. At Levitt & Slafkes, P.C., we have provided decades of smart, effective legal guidance to our clients. Bankruptcy is a big deal and we take your financial present and future very seriously. Let us help you get some relief. Contact Levitt & Slafkes, P.C., at (973) 323-2953, or reach us online to schedule a free consultation.

We are proudly designated as a debt relief agency by an Act of Congress. We have proudly assisted consumers in filing for Bankruptcy Relief for over 30 years.