To begin, you’ll classify the debt as either secured or unsecured. Then, you’ll categorize the unsecured claims as priority or nonpriority. This article will teach you how to properly label each debt and determine what will happen to it if you file for bankruptcy.
Incorporating Creditor Claims into Your Bankruptcy Documents
After you complete and file official bankruptcy forms, your bankruptcy case is initiated. The cover document, referred to as the petition, is where you will disclose personal information about yourself, such as your name, address, and the bankruptcy chapter for which you are filing. On schedules, you’ll detail your income, creditor claims (debts), and assets.
Creditor claims will be listed on one of the following schedules:
Schedule D: Creditors With Property-Backed Claims Secured claims, such as a mortgage, car payment, or other collateralized obligation, are included here.
Creditors With Unsecured Claims Schedule E/F This form is for listing unsecured claims. Part 1 is reserved for priority unsecured claims, such as unpaid taxes and child support. In Part 2, you’ll detail your non-priority unsecured claims (all remaining debts).
How Is a Secured Claim Defined?
In bankruptcy, a creditor with a secured claim has two things: a debt that you owe and a lien (also known as a security interest) on property that you own. If you default on your contract obligations, the lien enables the lender to seize the property, sell it at auction, and apply the proceeds to the account balance. For example, a mortgage lender with a lien may foreclose on real estate and a vehicle loan lender with a lien may repossess a vehicle.
Secured claims are frequently made voluntarily. For example, if you agree to pledge an asset as collateral for the loan (which is frequently done when purchasing a home or car), you voluntarily grant the creditor a security interest in your property.
Creditors may also place an unauthorized lien on your property without your consent. For instance, a credit card company may obtain an involuntary lien following a successful collection lawsuit. If you fall behind on your taxes, statutory law empowers the IRS to place a tax lien on your property.
Typical secured bankruptcy claims include the following:
- mortgages
- automobile loans
- unpaid property taxes, and
- other liens on real estate.
- You’ll list all secured claims on Schedule D: Creditors With Property-Backed Claims.
What Happens to Secured Claims When a Debtor Files for Bankruptcy?
Creditors who have a secured claim are in a favorable position. A bankruptcy discharge (the court order that eliminates debt) does not eliminate liens on your property. It merely removes your obligation to repay the debt.
Due to the continued existence of the lien, the creditor retains the right to foreclose or repossess the property if the loan is not repaid. Therefore, if you file for bankruptcy and wish to retain property used to secure a loan, you must continue making payments to the lender until the debt is paid off.
However, if a home or car has significant equity, a Chapter 7 trustee will likely sell it. However, due to the lien, the trustee must obtain sufficient funds to repay the loan, return any exemption amount to you (the amount of equity you are permitted to protect), and pay off creditors with the remaining funds. If there is insufficient equity to make meaningful payments to creditors, the trustee will not sell the property.
If the property you wish to retain has a significant amount of equity, a Chapter 13 case is almost always a better option. However, you must have sufficient income to make a substantial monthly payment for three to five years (you must pay the value of the nonexempt equity in the plan).
Getting Rid of Liens in Bankruptcy Certain types of property liens are dischargeable in bankruptcy. For example, you may be able to petition the court to:
- eliminate a judgment lien that interferes with your bankruptcy exemptions, or
- In Chapter 13 bankruptcy, you can eliminate an entirely unsecured junior lien on your property.
How Are Unsecured Claims Defined?
A creditor who has an unsecured claim is not entitled to a lien. Unsecured claims fall into two categories:
- Unsecured claims are given priority. These debts are not dischargeable in bankruptcy and will be paid before nonpriority unsecured claims if funds are available.
- Unsecured claims with no priority. The majority of these debts are dischargeable in bankruptcy (except student loans). Priority debts must be satisfied before bankruptcy funds can be used to pay these debts.
Unsecured Non-Priority Claims
The bankruptcy discharge will eliminate the majority, but not all, nonpriority, unsecured claims. Among the most common unsecured claims that can be discharged in bankruptcy are the following:
- debt incurred through credit cards
- medical expenses, and
- unsecured loans.
Although student loans are unsecured debts, they cannot be discharged unless you can demonstrate that paying them would cause you undue hardship (which is a difficult standard to prove).
Unsecured Claims with Priority
Priority unsecured debts are non-dischargeable and are treated differently. In bankruptcy, priority creditors receive payment before other creditors.
Among the most common types of priority claims are the following:
- alimony
- support for children
- certain tax responsibilities, and
- Debts incurred as a result of personal injury or death as a result of drunk driving.
Because Chapter 7 bankruptcy does not allow you to discharge priority debts, you will be responsible for any balance remaining after your Chapter 7 case (the bankruptcy trustee might sell some of your property and apply the funds to the debt).
If you file Chapter 13, you must repay all priority unsecured debts in full over the course of your three- to five-year repayment plan.
Unsecured claims will be listed on Schedule E/F: Creditors With Unsecured Claims.
Occasionally, it makes sense to file a proof of claim in your bankruptcy on behalf of a creditor who has not done so independently.
When you file for bankruptcy, the majority of your creditors will file a proof of claim – a document that details your debt – in order to be paid. Occasionally, a creditor will fail to file a proof of claim. In rare instances, you may wish to file a proof of claim on behalf of that creditor. This is why.
What Is a Claim Proof?
- Whether your creditors receive anything in your bankruptcy case is contingent on a number of factors, including the following:
- the nature of the creditor’s claim
- regardless of whether you own non-exempt property
- whether you have a source of revenue available to you, and
- regardless of whether you file for bankruptcy under Chapter 7 or Chapter 13.
- If a creditor wishes to be paid in bankruptcy, he or she must file a document called a proof of claim with the court. The proof of claim informs the court about your debt and typically includes documentation substantiating the creditor’s claim.
- Creditors will typically file their own proofs of claim. However, if one of your creditors fails to file a proof of claim, you may file one on its behalf if you wish to ensure that creditor receives payment during your bankruptcy.
Why Would a Creditor Choose Not to Submit a Proof of Claim?
Creditors file proofs of claim in bankruptcy in order to receive a share of any distributions made by the bankruptcy trustee in your case. If a creditor fails to file a proof of claim with the court, even if the creditor otherwise has a valid claim, the creditor will not be paid. However, creditors frequently fail to file proofs of claim in bankruptcy.
A creditor may choose not to file a proof of claim in your bankruptcy if one of the following applies:
- You have a Chapter 7 no-asset bankruptcy (which means you do not have any property that the bankruptcy trustee can distribute to your creditors, thereby preventing them from being paid).
- You owe the creditor a pittance, or
- The creditor does not follow the court’s instructions or makes an error in any other way.
Justifications for Filing a Proof of Claim Against a Creditor
While it may seem strange to file claims on behalf of creditors in one’s own bankruptcy case, it is sometimes necessary. The following section discusses when it may be prudent to file a proof of claim on behalf of a creditor.
You Desire to Consolidate Your Nondischargeable Debts
Certain debts do not disappear simply because you file for bankruptcy. Nondischargeable debts include alimony, child support, certain taxes, and student loans. Due to the fact that you will be responsible for repaying your nondischargeable debts after your case is closed, you want to ensure that these creditors are paid before your other unsecured creditors (such as credit card companies) in your bankruptcy.
This means that regardless of whether you have nonexempt assets that will be distributed to creditors in Chapter 7 bankruptcy or are repaying a portion of your debts in Chapter 13 bankruptcy, you want to ensure that any creditors with nondischargeable debts file proofs of claim with the court. If they do not, it is in your best interest to file a claim on their behalf to ensure that they receive a portion of the proceeds in your case.
You Wish to Make Up for Late Payments on Secured Debt
If you fall behind on your mortgage, car loan, or other secured debts, you may be able to file for Chapter 13 bankruptcy in order to catch up on your payments and keep your property. If the bankruptcy is being used to repay missed loan payments, you must ensure that the creditors you wish to repay (such as your mortgage or car lender) file proofs of claim with the court.
If they fail to file proofs of claim, the trustee may seek court approval to pay off your unsecured creditors in their place. This means that if a secured creditor to whom you intend to pay fails to file its claim, you may be required to do so on their behalf.
When Are Creditors Allowed to File Proofs of Claim?
The majority of creditors must file proofs of claim with the court within 90 days of your creditors’ meeting (government entities have 180 days from when you filed your case). Prior to filing a claim on behalf of a creditor, you must wait until the creditor’s deadline for filing its own claim has expired. After the deadline has passed, you have 30 days to file the creditor’s claim on your behalf.
