Even in bankruptcy cases, debts are categorized so that the bankruptcy court will know how to treat each debt properly. By category, there are three major types of claims or debts: secured claims, unsecured claims, and priority claims. However, this post will focus on unsecured claims to help debtors understand how such claims are treated in a bankruptcy case.
What is an unsecured claim?
The easiest definition of unsecured claims is “any debt that does not have any specific collateral or property like a car or a house set for it a payment for the debt”. The big difference of unsecured claims from secured ones is the presence of lien or collateral which can be taken away by the creditor/s. that is just to say that if a debtor who has an unsecured debt fails to comply on making their payments, then the creditor cannot take claim on those unsecured claim unless the creditor sues the debtor first and gets a court judgment.
Most of the time, unsecured claims are given a discharge but there are some cases wherein unsecured claims which are considered as priority claims like alimony and child support cannot be discharged by the bankruptcy court.
What debts are considered unsecured?
Most of the debts filed in bankruptcy cases are considered as unsecured debts. This is one reason why debts filed under Chapter 7 bankruptcy are more than any other bankruptcy chapters. This is because most of the time, unsecured debts can be easily discharged by the bankruptcy court so debtors are no longer liable to pay them to creditors. Some of the most common type of unsecured claims and debts are:
- Back rents with the exception of cases in states where landlord liens are allowed;
- Credit card debts;
- Garnished or attached court judgments;
- Income taxes with the exception of delinquent cases;
- Medical bills;
- Personal loans which do not require mortgages or security agreements;
- Student loans;
- Utility bills like telephone, water, and electric bills.
Take note that vehicle and home loans are always considered as secured debts or claims since they come with a lien/mortgage and the property itself serves as collateral which the creditor might take.
Court judgments on unsecured claims
Since creditors have no claims on unsecured claims, their best option is to file a complaint against the debtor in a state or federal court to get a court adjustment. By filing a lawsuit, the creditor will have the option of collecting the payment through collection remedies set by the state or federal law. On the other hand, the creditor who has a judgment may also obtain information regarding the debtor’s income, assets, and other obligations under oath, garnish the debtor’s bank accounts and wages, and/or attach and sell a debtor’s properties.
In this case, the debtor can protect themselves from the collection efforts of the creditors by making use of exemptions available to them to protect their properties and even their retirement plans if the need ever arise. On the other hand, each debtor must strive to seek the advice of a legal professional especially a bankruptcy attorney to help smoothen out the tough and complex process of filing a bankruptcy case.