Personal bankruptcy under Chapters 7 and 13 offer ways for people to obtain financial relief when their income is not high enough to continue making required payments on their debts. The federal Bankruptcy Code deals with different types of debt in different ways. The Bankruptcy Code establishes that certain types of debt have priority over others, and these creditors are therefore entitled to payment from the bankruptcy estate first. While many debts may be subject to discharge at the end of a personal or business bankruptcy case, some debts are expressly excepted from discharge, such as debts for recent taxes or child support obligations. However, these priority debts can be paid back via a Chapter 13 over a period of 3 to 5 years. Understanding how bankruptcy law treatss various types of debt is critical to planning and preparing for a bankruptcy filing.
Secured vs. Unsecured Debt
A key distinction in bankruptcy is between secured and unsecured debts. A secured debt has one or more specific items of property attached to it, known as collateral. See 11 U.S.C. § 506. A secured creditor has the right to take possession of the collateral if the debtor defaults on their repayment obligation. A mortgage, for example, is typically secured by the real property purchased with the mortgage loan.
Unsecured debt does not have collateral. The Bankruptcy Code divides unsecured debts into priority and nonpriority debts. 11 U.S.C. § 507. Many priority unsecured debts are also included in the list of debts excepted from discharge. 11 U.S.C. § 523.
The broad category of consumer debt includes debt incurred for personal purchases, ranging from basic necessities to luxury items. Most consumer debt is incurred on credit cards, which typically have no fixed repayment period and a variable interest rate. Credit card debt is almost always unsecured nonpriority debt.
Certain consumer debt can disqualify a debtor from Chapter 7 bankruptcy in certain situations. This includes recent large purchases, cash advances, and sometimes certain balance transfers. Upon motion of a creditor, a bankruptcy judge can be asked to dismiss an individual debtor’s Chapter 7 case, or convert it to Chapter 11 or 13, if certain criteria is met and established by the creditor so that the granting of relief under Chapter 7 “would be an abuse of the [chapter’s] provisions.” 11 U.S.C. § 707(b)(1).
A mortgage is a loan obtained from a bank for the purchase or refinance of real property, such as a residence. Homeowners may take out additional loans that, while also secured by the property, have lower priority than the first mortgage. If the fair market value of a property is less than the amount owed on a first-priority mortgage, a Chapter 13 debtor may be able to remove additional mortgage liens through a process known as “lien stripping.”
Loans taken out for the purpose of financing the costs of education are not subject to discharge in bankruptcy, except in very limited circumstances. 11 U.S.C. § 523(a)(8).
Debts incurred due to uninsured or underinsured medical expenses continue to be a major issue in personal bankruptcy cases, despite recent improvements in access to health insurance. This type of debt is generally unsecured and non-priority and can almost always discharged in a Chapter 7 or Chapter 13 case.
A lease on residential property, such as an apartment, includes an obligation to pay rent for a defined period of time. This is generally considered an ongoing expense rather than a debt, but Chapter 7 bankruptcy trustees have the authority to avoid an unexpired lease agreement under certain circumstances. 11 U.S.C. § 365(d)(1).
Since 1997, bankruptcy attorney Devin Sawdayi has represented individuals and families in the Los Angeles area in Chapter 7 and Chapter 13 cases. Contact us online, at (800) 474-6050, or at (310) 475-9399 today to schedule a free and confidential consultation to see how we may be of assistance to you.
More Blog Posts:
Courts Begin to Reconsider Standard Used to Determine Dischargeability of Student Loans, Los Angeles Bankruptcy Lawyer Blawg, April 4, 2016
Court Rules that Fines Under California’s Private Attorney General Act Are Not Dischargeable in Chapter 7 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, August 14, 2015
Chapter 7 Bankruptcy Case Reopened for Creditors Left Out of Debtor’s Schedules, Los Angeles Bankruptcy Lawyer Blawg, August 7, 2015