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What Happens to Unsecured Debts in Bankruptcy

How are secured and unsecured debts treated under bankruptcy? Are all unsecured debts the same or are there still specific types of unsecured debts? What is the chance that an unsecured debt will be paid when a debtor goes bankrupt? What are examples of unsecured debts?

Find out the answers to these questions from our guide.

Secured and Unsecured Debt Differences

To define an unsecured debt, one could not avoid but start by defining what is a secured debt. A secured debt is a debt protected by collateral or property, which serves as the guarantee that the lender can recover at least a part of what he is owed in case the borrower fails to pay.

A secured debt could arise from a loan transaction. A debt upon which a creditor has filed a notice of claim on certain of the debtor’s properties might also become a secured debt. Home and car financing are typical secured debts. Tax due to the IRS might also be secured if the IRS filed a lien against the debtor’s property. The process of settling secured debts depends on the bankruptcy filing, the state where the filing was made, among other factors.

Medical bills, newspaper subscriptions, health insurance premiums, and gasoline charges are considered unsecured debts. Typically, unsecured debts like unsecured notes, debts (credit card debts), and loans (for machines or tools, payday loan), mortgage payments, and general loans are cancelled under Chapter 7 filing whether or not they were paid in full. However, debts like alimony, child support, student loans and non-income-related tax bills would still remain either in Chapter 7 or Chapter 13 bankruptcy.

Hierarchy of Secured and Unsecured Debts

Payment time during bankruptcy, unsecured debts are paid after secured debts. Payments are made in this order: secured debts, unsecured priority debts, such as most taxes and outstanding alimony and child support, then general unsecured debts, such as medical and credit card bills. If there is not enough money from the sale of the bankruptcy estate of the debtor, those farther down the line of priority might not get anything at all. That is why creditors are also not always very enthusiastic in taking a debtor to court to recoup payment. It is because not guaranteed that for all his troubles, he would be able to collect on debts due.

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