Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority

Learn about secured, unsecured, and priority debts in bankruptcy.

Filing for bankruptcy involves disclosing your debts, or “creditor claims,” on official bankruptcy paperwork. But as easy as that might sound, classifying claims can get a bit tricky.

First, you’ll list the debt as either a secured or unsecured claim. Then, you’ll divide the unsecured claims into priority and nonpriority unsecured claims. In this article, you’ll learn how to properly label each debt and find out what will happen to it in bankruptcy.

Listing Creditor Claims in Your Bankruptcy Paperwork

A bankruptcy case gets started after you complete and file official bankruptcy forms. The cover document, called the petition, is where you’ll disclose identifying information, such as your name, address, and the bankruptcy chapter you’re filing. You’ll provide details about your income, creditor claims (debts), and assets on forms called schedules.

Creditor claims will appear on one of two schedules:

  • Schedule D: Creditors Who Hold Claims Secured By Property. Here you’ll include secured claims, such as a mortgage, car payment, or another collateralized obligation.
  • Schedule E/F: Creditors Who Have Unsecured Claims. You’ll list unsecured claims on this form. Priority unsecured claims, such as unpaid taxes and child support, belong in Part 1. You’ll list your nonpriority unsecured claims (all remaining debts) in Part 2.

What Is a Secured Claim?

A creditor with a secured claim in bankruptcy has two things: a debt that you owe and a lien (also called a security interest) on a piece of property you own. If you don’t pay according to the terms of your contract, the lien allows the lender to recover the property, sell it at auction, and apply the proceeds to the account balance. For instance, a mortgage lender with a lien can recover real estate in a foreclosure action, and a vehicle loan lender with a lien can recover a car through repossession.

Secured claims are often voluntary. For instance, if you agree to pledge an asset as collateral for the loan (a common practice when buying a house or car), you voluntarily give the creditor a security interest in your property.

Creditors can also obtain an involuntary lien against your property without your consent. For instance, a credit card company can get an involuntary lien after suing you in a collection lawsuit and winning a money judgment. When you fall behind on your taxes, statutory law gives the IRS the right to a tax lien against your property.

Common examples of secured bankruptcy claims include:

  • mortgages
  • car loans
  • unpaid real estate taxes, and
  • other property liens.

You’ll list all secured claims on Schedule D: Creditors Who Hold Claims Secured By Property.

What Happens to Secured Claims in Bankruptcy?

A creditor with a secured claim is in a good position. A bankruptcy discharge (the order that wipes out debt) won’t get rid of a lien on your property. It only eliminates your liability to pay the debt.

Since the lien remains, the creditor can still foreclose or repossess the property if the loan doesn’t get paid. So if you file for bankruptcy and want to keep property securing a loan, you’ll have to continue making payments to the lender until you pay off the debt.

However, if there is significant equity in a house or car, a Chapter 7 trustee will likely sell it. But, because of the lien, the trustee must get enough to pay off the loan, return any exemption amount to you (the amount of equity you’re allowed to protect), and use the remaining funds to pay off creditors. If there isn’t enough equity to pay something meaningful to creditors, the trustee won’t sell the property. (You can find out more about how this works by reading Will I Lose My Home If I File for Chapter 7 Bankruptcy?)

If a property you’d like to keep has significant equity, a Chapter 13 case will likely be a better option. But you’ll have to have enough income to pay a hefty monthly payment for three- to five-years (you must pay the value of the nonexempt equity in the plan). (Learn more by reading Keep Your House With Chapter 13 Bankruptcy.)

Eliminating Liens in Bankruptcy You can eliminate certain types of property liens in bankruptcy. For instance, you might be able to ask the court to: (Find out more about filing adversary proceedings in bankruptcy.)

What Are Unsecured Claims?

A creditor with an unsecured claim doesn’t have a lien. There are two types of unsecured claims:

  • Priority unsecured claims. These debts aren’t dischargeable in bankruptcy and, if money is available, the claim will get paid before nonpriority unsecured claims.
  • Nonpriority unsecured claims. Most of these obligations are dischargeable in bankruptcy (except student loans). All priority debts must be satisfied before these debts can be paid with bankruptcy funds.

(For a comprehensive list of unsecured claims, see What Is an Unsecured Debt?)

Nonpriority Unsecured Claims

The bankruptcy discharge will eliminate most types of nonpriority, unsecured claims, but not all. Some of the most common nonpriority unsecured claims you can discharge in bankruptcy include:

  • credit card debt
  • medical bills, and
  • personal loans.

Although student loans are unsecured debts, you can’t discharge them unless you can prove that it would be an undue hardship to pay them (which is a difficult standard to prove).

(See Student Loans and Bankruptcy for more information.)

Priority Unsecured Claims

Priority unsecured debts aren’t dischargeable and receive special treatment. Priority creditors get paid before other creditors in bankruptcy.

The following are some of the most common types of priority claims:

  • alimony
  • child support
  • certain tax obligations, and
  • debts for personal injury or death caused by drunk driving.

Because you can’t wipe out priority debts in Chapter 7 bankruptcy, you’ll be responsible for paying any balance that remains after your Chapter 7 case (the bankruptcy trustee might sell some of your property and apply the funds to the debt).

If you file for Chapter 13 bankruptcy, you’ll have to pay off priority unsecured debts in full through your three- to five-year repayment plan.

You’ll list unsecured claims on Schedule E/F: Creditors Who Have Unsecured Claims.

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