Bankruptcy entails seeking a court’s help to manage your debt. When your personal or business debts become overwhelming, this is a legal process that can help you manage your debt to start life afresh. However, the process can be overwhelming and challenging to navigate alone. A skilled bankruptcy attorney can help you in many ways, including identifying the right bankruptcy chapter for your needs and classifying your debt or claims into secured, unsecured, and priority debt. This will make it easy for the bankruptcy trustee to determine the debt to prioritize when settling your debt after a successful bankruptcy application.
Working closely with a competent attorney makes the process smooth. It also ensures you do not make mistakes that could worsen your situation or result in a denied bankruptcy application.
How to List Creditor Claims in a Bankruptcy Application
Bankruptcy is usually recommended as the last resort when all debt management strategies have failed to relieve your overwhelming personal or business debt. It requires you to think things through carefully and with the assistance of a skilled bankruptcy attorney. This is because bankruptcy has advantages and disadvantages worth your consideration for effective decision-making. Once you decide to go bankrupt, you need an attorney to walk the complex legal process with you. The process entails a lot, and so it can be overwhelming. Your attorney’s assistance will ensure everything moves on smoothly from the start to the end of the bankruptcy process.
One of the crucial things you have to do when applying for bankruptcy is to list your creditor claims. First, you must be aware of all your debt, from the most important to the least important. Understanding your debt makes it easy for you to plan how to repay it with the assistance of your bankruptcy trustees. You must also understand the various categories your debt falls into, whether unsecured or secured. Your attorney will help you identify which of your debts is secured and which are unsecured to make a reasonable classification.
Once you have the two major categories, you must list your debt in the order of priority, starting with the high-priority debt and moving to the least-priority ones. However, this does not mean that some of your debts are more important than others. Since some debts are more urgent than others, you must prioritize them. You can also prioritize your debt per the interest it accrues every month. The most expensive debt should appear first on your list to reduce the repayment costs. Creating a priority list ensures you understand what needs to be paid first with your income or money raised from your liquidated assets (this depends on the bankruptcy chapter you choose to file).
Thus, listing debt in a bankruptcy petition is critical. Remember that the bankruptcy process begins when you fill out and file the bankruptcy application forms with the court. Your cover document will be your bankruptcy petition, a letter to the court seeking assistance or help to manage your debt. Your petition must include your identifying details, including your name, contact details, address, and the type of bankruptcy you are applying for. You must also provide critical information, like your income, your debt, and what you own (assets), to help the judge determine your suitability for bankruptcy.
Your attorney will help you fill out schedules containing information about your assets and debts before filing them with the court. Your creditor claims or debt will appear under these schedules:
- Schedule D will contain creditors whose debt is secured by an asset. These are all secured debts like mortgages, car payments, and any other debt you acquired using collateral.
- Schedule E/F will contain all the unsecured debt in the order of priority. You can start with urgent debt like child support and pending tax payments and end with non-priority unsecured ones.
An Overview of Secured Claims
You enter into two agreements with your lender when you obtain a secured debt. The first agreement happens when you receive money from the lender, agreeing to repay it within a particular period. The second agreement occurs when you give your lender a security interest or lien on an asset you own (or the one you acquire with the debt). When you fail to repay the debt per the contract terms, the lien on your asset permits your creditor to recover the asset, auction or liquidate it, and use the income to settle your repayment balance.
For example, when you obtain a mortgage, and your lender has a lien on your property, they can foreclose it if you fail to make payments according to your agreement with your lender. Your car loan lender can also repossess your vehicle once you fail to repay promptly. Obtaining a secured debt is usually voluntary. You pledge a particular asset to your lender as security for the debt, voluntarily allowing the creditor to recover their payment from the collateral.
However, sometimes creditors obtain a lien from an unwilling borrower or against the borrower’s consent. For example, a credit card provider can file a debt collection lawsuit against you, obtaining the right to recover its money from your assets. Also, if you fail to pay your taxes, the law can give the IRS the authority to recover the debt from your property through a tax lien.
Here are examples of creditor claims you can list under secured debt in a bankruptcy claim:
- Auto loans
- Mortgages
- Unpaid taxes
- Property liens
The bankruptcy court prioritizes secured debt. Thus, these are some of the first debts the court will help you settle once the court grants your petition. Although the court can discharge some of your debts, a lien on any of your assets is not dischargeable. The court can only eliminate your responsibility for the debt. With the lien still intact, your creditor can repossess or foreclose the asset if you fail to make payments.
Thus, if you declare bankruptcy and hope to keep the property used as collateral for a secured debt, you must continue making repayments to avoid losing it to your lender. The approach your bankruptcy trustee will use in repaying your secured debt will depend on the bankruptcy chapter you choose to file. Remember that you can only file Chapter 13 if you make enough income to repay your debt. If not, your attorney will advise you to go for Chapter 11, which allows your trustees to liquidate your assets to pay your debt.
An Overview of Unsecured Creditor Claims
An unsecured claim occurs when you obtain credit and promise to pay it off but do not offer anything to the lender as collateral. If you fail to repay an unsecured debt, the creditor has nothing to liquidate or keep to recover their losses. However, they can file a lawsuit against you, requesting the court to allow them to repossess or foreclose your assets to recover their payments. Here are examples of unsecured debt:
- Student loans
- Medical bills
- Utility bills
- Departmental store charges
When classifying unsecured creditor claims in a bankruptcy application, you will have two sub-categories, namely:
Priority Unsecured Debt
These are non-dischargeable debts under the bankruptcy law. If you have the money or ability to repay this debt, you will pay it before the nonpriority debt.
The Nonpriority Unsecured Debt
Most dischargeable debt falls under this sub-category, except student loans. You must pay the priority debts first before paying debts under this category.
After a successful bankruptcy application, the bankruptcy court will discharge some of your unsecured debt. This should leave you with a few debts under this category. However, they will come last after the secured debt because unsecured loans are considered non priority. After paying off the priority debt, you will only repay those if you still have funds available. Your bankruptcy trustee will explain how you will repay the unsecured debt, depending on the specific bankruptcy chapter you have filed for and your income or assets.
Priority Unsecured Debt
These are nondischargeable debts in Chapter 7 bankruptcy. They are given top priority after secured debt when developing a repayment plan for your debt. You will prioritize these debts over the nonpriority unsecured debts (those that remain after debt discharge). Examples of debts under this category include the following:
- Pending alimony or spousal support payments
- Pending child support payments
- Pending income tax payments (those you have incurred within three years)
- Unpaid debts for wrongful death or personal injury caused through drunken or drugged driving
Bankruptcy allows you to wipe out some of your debt to concentrate on repaying critical ones. Sadly, you cannot wipe priority unsecured debt through debt discharge. However, your bankruptcy trustee can liquidate some of the nonexempt assets to repay the nondischargeable debts.
If you file for Chapter 7 bankruptcy, your bankruptcy trustee is responsible for liquidating your assets to generate an income for your debt repayments. If the money generated by the trustee is insufficient to pay off all your debts, the trustee will prioritize the priority debts, leaving you with the responsibility to pay off the remaining debt.
If you opt for Chapter 13, your bankruptcy trustee helps you develop a repayment plan for three to five years. You must pay all your debt within this period, including the priority unsecured debt. The plan will prioritize the secured debt, followed by the priority unsecured debt, and then the nonpriority unsecured debt. However, you must demonstrate an ability to generate enough income to pay off your debt within that period to qualify for this bankruptcy.
Nonpriority Unsecured Debt
These are some debts the court will discharge through bankruptcy debt discharge. If some of the debt remains in this category after discharge, it will be the last category of debt to pay when repaying your creditors. You have to give priority to your secured and priority unsecured debts. Examples of debt under this category the court can discharge include the following:
- Credit card debt
- Personal loans
- Medical bills
Even though student loans are part of the unsecured debt, they are nondischargeable unless you demonstrate that your inability to pay the debt is due to an economic hardship.
When filing for Chapter 7 bankruptcy, your ability to repay nonpriority unsecured debt lies in the value of your nonexempt assets. Your bankruptcy trustee will liquidate any other asset and property you cannot exempt from bankruptcy to generate money for your creditors. If the money is enough to pay the nonpriority debt, the trustee will pay the debt for you. Otherwise, they will only pay what your assets can cover and leave you to repay the remaining debt.
If you choose Chapter 13, you will develop a repayment plan with the assistance of your bankruptcy trustee. The plan will cover all your debt, including nonpriority unsecured debt. It will be based on your income and debt and run for three to five years.
Working with a skilled bankruptcy attorney is advantageous because they will consider all possibilities to help you determine your best bankruptcy option. Your attorney will also ensure the court discharges your debt and protects your non-exempt assets. You will likely enjoy a favorable outcome with the right attorney.
Find a Reliable Bankruptcy Attorney Near Me
Filing for bankruptcy is usually a challenging thing to do. Since it has several disadvantages, including a negative impact on your credit score, it should be your last resort when other debt management strategies fail. The bankruptcy process is also complex and challenging to navigate alone. There is usually no guarantee that the judge will grant your request.
Our skilled attorneys at Los Angeles Bankruptcy Attorney can help you make the right decision after reviewing your financial situation and options. They will also help you navigate the complex legal processes successfully. Since we understand how critical classifying your debt is to the success of your petition, we will ensure you avoid regrettable mistakes. Call us at 424-285-5525 to learn more about your type of debt for proper classification. You can also count on us for a successful bankruptcy petition.
