In personal bankruptcy, your creditors will be sorted into groups by the claims they have. Some will have legal priority over others. Have a strategy going into bankruptcy and a plan to deal with each creditor.
Try not to worry. Let an experienced bankruptcy lawyer with Allegiant Law Group guide you through the entire process.
Creditors File Claims in Chapter 7 and Chapter 13
When you file your Chapter 7 or Chapter 13 petition, each creditor is notified and given time to file a proof of claim with the bankruptcy court. There are two main categories of creditors – unsecured and secured.
Let’s focus on your unsecured creditors first. These include most credit card debts, medical bills, utility bills, alimony, and so on. (We’ll get to secured claims last.)
Two Types of Unsecured Claims in Bankruptcy
Unsecured debts are divided into priority claims and non-priority claims. Federal law tells us how to rank each unsecured creditor by type of claim. Priority is important to creditors and debtors alike. That’s because unsecured creditors with priority claims are in the best position to receive money if there is a distribution. Whereas unsecured non-priority claims are discharged in bankruptcy. (Discuss student loans, recent taxes, and other exceptions to discharge with your attorney.)
Unsecured Priority Claims
Some unsecured claims are simply more important. For public policy reasons, the U.S. Bankruptcy Code gives certain unsecured creditors a greater right to payment than others. Take a look at five common priority claims:
• Domestic Support Obligations (DSOs) are ongoing obligations to pay child support, alimony, spousal maintenance, and family support. These are claims arising “after the date of the filing of the petition” to a creditor who is your spouse or former spouse, to your child or the other parent (or legal guardian or responsible relative). A governmental unit could also be a creditor, including the Arizona Department of Economic Security Child Support Services.
• Administrative Expenses are costs incurred by the trustee assigned to your case. This covers attorneys and accountants hired by the trustee, too.
• A Personal Injury Claim arises out of the debtor’s DUI where the injured person is awarded money damages for the harm inflicted.
• Money Deposited for Personal Services or Property covers funds deposited with the debtor for personal, family, or household goods or services. However, the debtor never delivered those goods or services.
• Unpaid Taxes owed to federal, state, or local governments. Not all tax claims have priority! See 11 USC § 507(a).
There are other priority claims that might apply to you. Contact us to receive the Arizona Personal Bankruptcy Handbook by attorney Scott David Stewart. This handy guide will answer many of your questions.
Unsecured Non-Priority Claims
Now let’s look at the general unsecured creditors who file proofs of claim in your case. They do not have priority in bankruptcy law. And because they have no liens on your assets, they have no superior rights over other creditors. They’re last in line to get paid if there is a distribution.
For example, most credit card issuers are unsecured. Medical services claims that do not qualify for healthcare provider liens are also unsecured. As are memberships, subscriptions, and the water company.
What happens to these claims in bankruptcy? Consider a few possibilities:
• Petitioner’s Chapter 7 is determined by the trustee to be a No Asset Case. Unsecured non-priority debts are discharged.
• Petitioner’s Chapter 7 is determined to be an Asset Case. After unsecured priority claims are paid, there is nothing left to distribute to unsecured non-priority creditors. Unsecured non-priority debts are discharged.
• Petitioner’s Chapter 13 plan pays “pennies on the dollar” to unsecured creditors from debtor’s disposable income. Upon completion of the plan, unsecured debts are discharged.
At the beginning, we mentioned two main categories of claims – unsecured and secured. Secured creditors have a special connection to the debtor’s property.
Secured Claims in Bankruptcy
Every secured creditor claims some security interest, or lien, on specific property owned by the debtor. For instance, your car is collateral for the car loan. When you borrowed money to buy your house, the mortgage lender took a security interest in the real property.
Secured creditors also jockey for position in bankruptcy. To name a few, there are mortgages and deeds of trust on the debtor’s residence, consensual liens collateralized by the debtor’s vehicle and equipment, judicial liens following breach of contract, and statutory liens by hospitals, ambulance companies, and so on. Secured creditors have a distinct advantage over unsecured creditors.
This brings us to the next important point. There are two types of secured claims. Those with consensual liens (a car loan) and those with statutory liens (the healthcare provider lien).
Consensual Liens on Debtor’s Property
Consensual liens arise voluntarily by agreement between the parties. If the borrower defaults on a loan, then the secured creditor has the right to repossess the collateral or foreclose on the real estate securing that loan. The creditor sells the asset according to law, applying the sale proceeds to the debt. When the sale doesn’t bring enough to pay off the loan, the balance becomes unsecured. These unsecured non-priority claims are discharged in bankruptcy.
Note: If repossession or foreclosure has not yet happened and the debtor wants to keep the vehicle or residence after bankruptcy, then the parties (both debtor and secured creditor) will need to enter into a new agreement requiring court approval. Bring this up when you meet with an Allegiant Law Group lawyer.
Arizona Statutory Liens on Debtor’s Property
Lastly, there is the secured creditor with a nonconsensual lien on the debtor’s property. Several Arizona statutory liens may be imposed under various circumstances:
• Judgment liens
• Healthcare providers’ liens (ARS § 33-931)
• Innkeepers’ liens (ARS § 33-951)
• Mechanics’ and materialmen’s liens (ARS § 33-981)
• Personal property liens (ARS 33-1021) and
• Real estate brokers’ liens (ARS § 33-1071).
All of these are nonconsensual because the debtor cannot refuse or reject attachment of the lien. Don’t misunderstand. You still have enforceable rights in these matters.
How will bankruptcy work with your creditors? Contact us. We’ll conduct a preliminary analysis and explain possible options. Trust that things will get better with our help.