There are three ways to classify debts in bankruptcy 1. Secured. 2. Unsecured, and 3. Priority. The ability to discharge a debt will depend on the chapter that you file for, the age of the debt, and the public policy. Discharging debt in a bankruptcy would involve classification of the creditors’ claim and an analysis of the property you own. Secured debt has an interest in the collateral. Secured debt has two classifications as discussed below.
Purchase money security interest could be for the original finance company that finances the collateral. The best example would be a car note or house note. If you do not pay on the debt, then the property can be taken by the creditor. Rules of repossession, typically, require that the peace must not be breached. You have the right to cram down on this type of debt in a chapter 13 bankruptcy and a right of redemption in a chapter 7 bankruptcy. Cram means you can pay the debt at what the property is worth and not on what is owed. You also can lower the interest rate redemption means to pay the property off at a lump sum amount at the fair market value. This is typically difficult to do in a chapter 7 bankruptcy as you need to have a lump sum amount.
Non-purchase money security debt is typically a refinance or loan against household goods and furnishings. Sometimes, you can avoid the security interest in a bankruptcy and the lien holder loses the status to an unsecured creditor. Federal tax lien would fall into this category. You can both cram and avoid the lien in a bankruptcy. The tax lien attaches to the total value of all the property that you own. After you file the bankruptcy, the lien does not attach to the after-acquired property.
In most cases, this type of debt must be paid in full in a chapter 13 bankruptcy. Best example of this is child support and taxes that are less than three years old. For public policy reasons, these are treated differently and are given priority for payment. In a chapter 7 bankruptcy the debt is not discharged and survives the bankruptcy.
This type of creditor has no security interest in your collateral.Unsecured debt includes creditcards, medical bills, deficiency on foreclosures, deficiency on repossession, broken apartment leases, and broken cell phone contracts.
You will usually discharge all of your unsecured debt in a chapter 7. Secured creditors to which the property is surrendered back , will result in no liability for any deficiency. Discharge of the debt means that you are longer legally obligated to pay the debt. As a result, you cannot be sued nor it should be reported on your credit report as a past-due account. They could report that you once had an account with that creditor but the balances must reflect zero in the credit report. Creditors are not permitted to issue the 1099 forgiveness of debt if you have discharged the obligation in the bankruptcy.
The discharge in a chapter 13 is broader than a chapter 7. You can discharge certain divorce decree debts, debts that were incurred to pay non-dischargeable taxes, unemployment or social welfare payments, pending personal injury claims, and tax debt that was not based on a fraudulently filed return. It takes longer to get a discharge in a Chapter 13 bankruptcy v. the Chapter 7 bankruptcy. In Chapter 13, the repayment plan is of 3 to 5 years.