There are three classifications for debts in a bankruptcy. They are: Priority debts, Secured debts and Unsecured debts.
Priority debts are generally not dischargeable, they include debts like those to the IRS, domestic support agreements and penalties for death or personal injuries arising from DUI offenses (If you do have a DUI scenario that sounds like this, please call our office to speak with a Jacksonville DUI Attorney as it is easier to defend the DUI liability than trying to discharge it in bankruptcy). You will continue to owe Priority debts after a Chapter 7 as well as after a Chapter 13 until or unless they are paid off.
Secured debts are monies owed pursuant to a purchase contract, such as a car with a purchase money security or a house with a mortgage. A debtor has three choices when it comes to secured debts in a Chapter 7 bankruptcy:
1. Surrender. The debtor can surrender the secured asset to the creditor to satisfy the debt.
2. Reaffirm. The debtor can offer to the creditor a new contract to allow them to keep the property- typically this is done with the same initial terms as the original contract. It is important to remember that this is an offer to reenter the contract, the creditor is not obligated to agree, though they usually do as long as payments are up to date.
3. Redeem. The debtor can pay the creditor the market value of the secured asset and keep the asset. Since market value is often less than the value in the secured instrument, this is an attractive choice, but it is rarely used because the money is owed at that time- while the debtor is in bankruptcy.
Secured debts in a Chapter 13 are treated differently than in a Chapter 7. In a Chapter 13 the debtor can either surrender the asset or continue to pay on it through their bankruptcy plan. Chapter 13 offers the unique ability to “catch up” on arrearages over the life of the plan, so payments on a secured asset in a Chapter 13 need not be up to date and the creditor has little choice but to allow the debtor to make up the money owed over the length of their plan. There is also the possibility of doing a “Cram-Down” as outlined in my earlier article on Cram-Downs.
Unsecured debts are monies owed with no security interest, such as credit cards, payday loans, etc. These are generally eliminated in a Chapter 7 bankruptcy. In a Chapter 13, secured creditors may get very little (though never less than they would get in a Chapter 7), they may also get paid off entirely, it depends on the kind of repayment plan your debt and disposable income requires.
If you have questions as to what kind of debt you have or whether it can be discharged in a bankruptcy, please call one of our bankruptcy attorneys at 904-685-1200 and schedule a free consultation.