While you might already be aware of the fact expressed in this post’s title, it is important to distinguish the different kinds of debt and how it will impact your bankruptcy case. Debt comes in a variety of different forms, and it’s likely that you will have debt that falls under more than one of the three types of debt I will detail in this post. It is important for you to identify the different types of debt you have so that you can better plan for the steps in your bankruptcy case. What you get to keep and what debts you will be forced to pay are often determined by the classification of the debt owed.
The first distinction you need to make is between secured and unsecured debt. Simply put, secured debt is that which is connected to a piece of collateral. Your car, your home, your appliances – anything physical for which you owe is considered a secured debt. If you cannot pay for an item, then the lender is within their rights to take back collateral. Unsecured debts are those that cannot be tied to any collateral. These sorts of debts include student loans, taxes, child support, credit cards, etc. Because there is no collateral item that the lender can repossess if you don’t pay an unsecured loan, they are usually resolved through the intervention of collection agencies and can lead to more complex legal battles.
Within these two categories of debt – secured and unsecured – there are subcategories that make several key distinctions. Secured debts can be partially secured or fully secured. Let’s say, for example, that you purchase a television worth $700 but now owe $950 on it. In that case, only the $700 is secured, while the remaining $250 is unsecured since it is debt owed that is beyond the full value of the collateral item.
Unsecured debts can be broadly categorized as either general unsecured debts or priority debts. Priority debts are those which are most important for you to pay back, as determined by the law and the court. Some priority debts that are common in individual bankruptcies include taxes, child/spousal support, and court costs. For this reason, it is almost impossible to get those types of debt wiped away through either a Chapter 7 or Chapter 13 bankruptcy. General unsecured debts, then, are your remaining unsecured debts. These are the types of debts that you are most likely to get dismissed in a bankruptcy case because they aren’t connected to a piece of collateral, and they are not determined to be a priority by the court. Keep in mind, however, that lenders may still try to challenge a dismissal of debt even if the court does not deem it a priority.
Now that I’ve outlined the main categories of debt, you should be able to start taking mental stock of the types of debt in your own life. If you plan on filing for bankruptcy, you should consider what collateral items are most important to you, and which ones you couldn’t live without (i.e. house, car, etc.). As you can see, however, bankruptcy is a complicated process, and you’re going to want experienced legal counsel guiding you through these important steps. If you live in Iowa, call our office today to schedule a free consultation.