When you file bankruptcy, you will have to list all of your creditor claims in your bankruptcy paperwork. As you start your Chapter 7 or Chapter 13 bankruptcy case, you will have to separately list your secured creditor claims and your unsecured claims.
Not everyone understands the difference between secured and unsecured claims, but it’s pretty simple to differentiate the two. Secured claims are those debts with a lien on a piece of property you have (think of an automobile or a house with a mortgage).
If the word “lien” makes you think of tax liens, that’s not what we’re referring to. In the case of a bankruptcy, a lien is a creditor’s right to keep or possess a debtor’s property until the person’s debt is paid off. In other words, if you fall too far behind on your mortgage or on your car payments, the lender can by law, take the property back.
Examples of secured claims:
- Auto loans
- Boat loans
- RV loans
- Property liens
- Unpaid real estate taxes
What is an Unsecured Claim?
Unsecured claims are the opposite of secured claims: There is no property to seize, repossess, or foreclose upon. Examples of unsecured claims are child support debt, alimony debt, credit card debt, tax debts, and personal loans.
There are key differences in secured vs. unsecured claims. Essentially, creditors with secured claims are in a better position than unsecured creditors. For example, while a bankruptcy discharge may wipe out debt, it cannot eliminate a lien on a debtor’s property. The discharge only eliminates the debtor’s liability to pay the specific debt. Since the lien is still there, the creditor can go ahead and repossess or foreclose on the property if the debtor fails to pay the debt.
Priority vs. Non-Priority Unsecured Claims
Unsecured creditors do not have a lien, but for bankruptcy purposes, some unsecured debts, such as child support and alimony are “priority debts,” and they cannot be discharged in bankruptcy. They are priorities above all other debts and will get paid before non-priority unsecured claims.
As a rule, bankruptcy discharges eliminate most nonpriority, unsecured claims, such as credit card debt, medical debt, and personal loans. Old taxes may be discharged as well depending on the age of the taxes.