Chapter 13 bankruptcy is essentially a process created to help a debtor deal with the fact that he has more debts than assets, and to figure out how best to distribute the assets that he does have among the debts that are owed.
In order to determine how assets and chapter 13 plan income should be distributed to satisfy debts, one must look at the types of claims that various creditors have. Different types of claims by creditors are given different levels of priority, and this priority determines who gets paid first. Where there are far too few assets to go around, it becomes increasingly important for creditors to improve the priority of their claims in order to get paid.
What Type of Creditor Claims Exist in North Central Wisconsin?
When you enter into chapter 13 bankruptcy, the first thing the bankruptcy trustee will do is get a full accounting of your assets and debts. To that end, creditors will be given the opportunity to submit their claims (debts you owe) to the bankruptcy trustee and ask that those claims be paid out of the bankruptcy assets and/or through the Chapter 13 plan.
In doing so, creditors will have one of three types of claims to submit:
- A secured claim
- An unsecured claim
- A priority claim
Priority claims, as the name suggests, receive first preference in a bankruptcy action. This means that priority creditors will get paid before other creditors do. But one cannot simply declare themselves a priority creditor. Instead, only certain types of debt qualify for this status.
Often times, priority debts are also nondischargeable debts. This means that they cannot be eliminated through bankruptcy. For this reason, it is actually helpful to a debtor that they be priority claims, as the debtor wants to ensure that they get paid off during bankruptcy, otherwise the client be on the hook for them even after the bankruptcy is over.
Debts owed to the government are usually priority debts. These include outstanding federal and state income tax that you may still owe, property taxes, or employer taxes that you may owe if a small business is declaring bankruptcy.
Certain payments ordered by the courts are also priority debts, including amounts you may owe to a plaintiff due to a death or personal injury case, and payments owed to another for spousal maintenance or child support. If you have any of these types of outstanding payments, anticipate that they will have to be paid off first through a bankruptcy payment plan or with assets you currently own.
Next In Line: Secured Claims
After priority claims are addressed, bankruptcy trustees next turn to secured claims from creditors. Secured claims are, as the name suggests “secured” by a lien against some other type of property that you may own.
Where you offer an asset to secure a debt, this is known as a voluntary secured claim. Where a creditor seeks a judgment against you and uses the judgment to file a lien against your property, this is known as an involuntary secured claim. The claim is still secured by the property you own, only you did not agree that the property be used in that way.
Common secured claims occur where a lender loans you money to buy a certain item or piece of property, but retains an interest in that item or property until it is paid off. For example, if you take a loan out on a home, your mortgage lender will continue to have a claim on your house until the house is paid off. This is a type of secured claim. The same is true for car loans, or loans to buy furniture.
Secured claims can be dealt with in bankruptcy, either by using bankruptcy assets to pay off the claim, or creating a payment plan to pay the debt. In some instances, however, the lien that a secured creditor has on your property may remain even after bankruptcy, and can result in foreclosure. Depending on the circumstances of the lien, a bankruptcy attorney may be able to eliminate it for you in the Chapter 13 bankruptcy process.
Lowest on the totem pole are unsecured claims. As mentioned above, these are any types of claims for money owed where the debt is not secured by another piece of property or asset. These could include debts for failure to pay a contract you signed, for failure to pay a bill for a service such as a medical bill, as well as credit card debts and personal loans that friends have made.
Unsecured claims are typically paid last in the bankruptcy process and there often are not sufficient assets left over to pay unsecured creditors. Even though this is the case, these debts will usually be discharged in bankruptcy even if unpaid. This is one of the benefits of declaring bankruptcy.
One significant exception to the dischargeability of unsecured debts for younger debtors is a student loan. Student loans are not dischargeable in bankruptcy and must be paid in full, no matter what your financial circumstances may be.
Disclaimer: This Article Is Not Legal Advice.
Never rely on an article for legal advice as the law frequently changes, information may not be accurate, there may be exceptions to a rule, and reliance may be detrimental. Always consult one of our experienced attorneys for competent, current, and accurate legal advice.
Wisconsin Attorneys Helping You Evaluate Potential Creditors In Bankruptcy
If you are considering filing for bankruptcy, or filing on behalf of a business you own, part of evaluating the possible success of the bankruptcy process is considering what types of claims your creditors may have. For example, if they have claims that will not be discharged in bankruptcy, this may factor into whether bankruptcy is a good option for you.
At Crooks, Low & Connell, S.C, our bankruptcy attorneys can help you organize and evaluate potential debts and creditor claims that will likely impact your bankruptcy. For more information, or to schedule a consultation, contact our Wausau, WI offices online or at (715) 842-2291.