Secured vs Unsecured Debt: Understanding the NJ Bankruptcy Petition

New Jersey bankruptcy

At the beginning of every bankruptcy case, the person filing will need to complete official bankruptcy forms. The cover document, known as the petition, will include identifying information like your name, address, and the chapter of bankruptcy you are filing. The petition will also include information about your income, your creditor claims (or debts), and assets in specific forms called schedules. Classifying creditor claims can be complicated. All of your debts will need to be listed as either a secured or unsecured claim. It’s important that you properly label each debt. Here, we look at how to list creditor claims in your bankruptcy paperwork.

Secured Claims

In order to have a secured claim in bankruptcy, you must have two things: a debt that you owe and a lien or security interest on property that you own. Examples of secured debt are a mortgage, a car payment, or another collateralized debt. If you fall behind on payments or are unable to keep up with the terms of your contract, the lien can allow the lender to recover the property through foreclosure or repossession. The lender will then sell the property and use the proceeds to pay down your account balance. Secured claims are typically voluntary, but a creditor could obtain an involuntary lien against your property. A creditor could secure an involuntary lien against your property through a lawsuit, whereas if you fall behind on your taxes, the IRS automatically has the right to a tax lien against your property.

During bankruptcy proceedings, a creditor with a secured claim has an advantage. A bankruptcy charge will remove your obligation to pay a debt, but it will not remove a lien on your property. Because of this, a creditor can still opt to take back the property if the loan does not get paid. Therefore, if you file for bankruptcy but you don’t want to lose your property, continue making payments to the lender until the debt is paid off. It is possible to get rid of specific types of property liens in bankruptcy. One option is to get a legal judgement on the grounds that a lien negatively impacts your bankruptcy exemptions. Another option is to wipe out an unsecured junior lien through Chapter 13 bankruptcy.

Things can get complicated, though, if there is significant equity in the property in question, as you will be able to protect a certain amount of equity in bankruptcy. Under Chapter 7 bankruptcy, the trustee will likely try to sell the property. However, the trustee has to make enough in the sale to pay off the loan, return any exempt funds to you, and pay off creditors. The trustee will likely not sell the property if there is not enough equity to pay something worthwhile to creditors. On the other hand, a Chapter 13 bankruptcy will allow you to keep any property with significant equity, as long as you can afford high monthly payments towards the nonexempt equity in the plan.

Unsecured and Priority Claims

With unsecured claims, there is no lien involved in the debt owed. It is, however, important to know if the claim is priority unsecured or nonpriority unsecured. Priority unsecured claims are not dischargeable and will take precedence in repayment plans over nonpriority debts. Examples of priority claims are alimony, child support, tax obligations, and debts from personal injury or drunk driving lawsuits. Priority debts cannot be discharged in a Chapter 7 bankruptcy and you will still be responsible for paying back the full balance. In Chapter 13 bankruptcy, you will have three to five years to pay back the balance in full.

Nonpriority unsecured claims are dischargeable with the exception of student loans. Before these debts can be paid with bankruptcy funds, all priority debts must be taken care of first. Examples of nonpriority unsecured claims are credit card debt, medical bills, and personal loans.

Filing for bankruptcy includes a lot of detailed, complex paperwork. Determining how to categorize your debts can be confusing for the average consumer. Veitengruber Law offers a total approach to debt relief. Our experienced legal team knows how to expertly demystify the bankruptcy process so that our clients have a clear understanding of what is happening – every step of the way.

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Can I File for Chapter 7 and Chapter 13 at the Same Time?

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“Sometimes one bankruptcy isn’t enough.” – George Veitengruber, Esq.

As we’ve discussed before on our blog, there are time limitations put into place that prevent a debtor from receiving a second chapter 7 discharge unless at least eight years have passed since their first chapter 7 discharge. You also cannot be granted a chapter 13 discharge unless at least four years have passed since you filed for chapter 7, so where on earth can we possibly be going with this?

Bankruptcy law disallows back to back bankruptcy discharges in order to avoid people abusing the bankruptcy system. With no restrictions, any debtor could theoretically bounce from one bankruptcy discharge to another, and that wouldn’t be fair to creditors, nor would the debtor learn any valuable lessons regarding their finances.

There are situations, however, wherein a debtor can file consecutive bankruptcy cases, but only when the desired outcome is not a second discharge.

Most people associate bankruptcy with ridding themselves of all of their debt, the closest thing to a financial “do-over” that exists in the real world. While a bankruptcy discharge can indeed be akin to a capital tabula rasa, giving debtors a clean slate isn’t the only function of the bankruptcy system.

For example, one of the most beneficial (and immediate) effects of filing for any type of bankruptcy is the automatic stay:

Automatic stay \noun\  a judicial order known as an injunction that halts any and all lawsuits as well as actions by creditors attempting to collect money from someone who has filed for bankruptcy

Many people file for chapter 7 when they have a significant amount of unsecured debt.

Unsecured debt \noun\ a debt that doesn’t have any collateral attached to it that a creditor could take for payment if the debtor defaults
Examples of unsecured debt: credit card debt, student loans, utility bills, medical bills, some taxes, and most personal loans

In filing for chapter 7 relief, many or all unsecured debts can be discharged at the end of the bankruptcy case, as long as the applicant meets the filing requirements and no fraud is at play.

Frequently, a discharge of all unsecured debts so significantly reduces the financial strain on the debtor that they are then able to resume paying their monthly living expenses without difficulty.

Sometimes, though, even after a chapter 7 wipes out a huge chunk of their debt, some people are still left facing a significant amount of non-dischargeable debts.

Non-dischargeable debt \noun\ money owed that can almost never be discharged via any type of bankruptcy proceeding
Examples of non-dischargeable debt: child support, alimony, student loans, income tax debt

Still other people, after filing for chapter 7 and receiving a discharge, are left with secured debt(s) that they want to continue making payments on in order to keep the property that secures the debt(s) in question.

Secured debt \noun\ a debt that has collateral attached to it that a creditor could take for payment if the debtor defaults
Examples of secured debt: home mortgage, auto loan, valuable personal property loan (mechanical equipment, furniture, tools, etc)

Whether the debtor is left with substantial non-dischargeable debt or secured debt(s) that hold important value (usually a mortgage and/or auto loan), filing for chapter 13 immediately after a chapter 7 discharge will allow for a reorganization of any subsequent arrears owed, allowing the debtor to bring the loan(s) current.

Veitengruber Law can navigate your path through multiple bankruptcies! If you thought your financial situation was too “messed up” to be fixed – think again. Even better – we want to help you. Please give our office a call if your debts have gotten out of control. Your consultation won’t cost you thing, so you’ve got nothing to lose.

Image credit: Alachua Cty