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What Is An Unsecured Claim In Bankruptcy

Learn What It Means For A Bankruptcy Claim To Be Contingent Unliquidated Or Disputed

Bankruptcy Questions : What Is an Unsecured Claim in Bankruptcy?

By Cara O’Neill, Attorney

Filing for bankruptcy involves filling out numerous bankruptcy forms. On them, you’ll explain your financial situation so that the court, trustee, and creditors know:

  • how much you make and owe
  • what property you own
  • your monthly budget, and
  • whether you’ve transferred any property recently.

Of course, listing debtcalled a claim in bankruptcyis a pretty important part of the process.

Not only will you disclose the creditor name and amount you owe, but you’ll explain whether an issue needs resolving before paying the claim. You’ll do this by labeling the claim contingent, unliquidated, or disputed.

The Amount You Must Pay For All Unsecured Debt

First, you’ll calculate how much you’ll be required to pay toward all of your unsecured debtpriority and general secured alike. The amount will depend on:

  • whether you qualify for a Chapter 7 discharge
  • the amount your unsecured creditors would have received had you filed for Chapter 7 bankruptcy , and
  • how much “disposable income” you’d have after paying allowed obligations.

Here’s how the calculations work.

Chapter 7 Qualifications

Most Chapter 13 filers do so because they couldn’t qualify for Chapter 7 bankruptcy. But that’s not always the case. Some people choose to file for Chapter 13 because it offers benefits not available in Chapter 7. For instance, only Chapter 13 allows filers to catch up on home arrearages and keep a house, or pay off nondischargeable debt such as domestic support arrearages over three to five years.

People who qualify for Chapter 7 are only required to file a three-year repayment plan, and they don’t need to worry about paying all of their disposable income into the plan. These debtors can choose to pay up to five years and many do because a lower monthly payment can help with plan confirmation.

All Debtors Must Comply With the Best Interests of Creditors Test

The “best interests of creditors” test requires all Chapter 13 debtors to pay unsecured creditors at least as much as they would receive in a Chapter 7 liquidation. So how do you figure out how much that would be? It isn’t as hard as it might sound.

Here’s why it works that way.

What Does Priority Claim Mean

In bankruptcy, priority unsecured debts are treated differently in two ways. First, as the term suggests, creditors with priority unsecured claims get priority over general unsecured creditors. For example, in a Chapter 7 case with assets to be distributed, priority claims are paid first. Other unsecured creditors will only get whatâs left over after priority claims are paid. If there isnât enough to go around, the nonpriority claims donât get paid.

Some of the most common types of priority unsecured debt include:

  • Child support

  • Other domestic support, such as alimony

  • Certain income taxes, depending on age and whether they were timely filed

  • Certain other taxes, including some property taxes

  • Personal injury and wrongful death claims associated with driving while intoxicated

Although youâll often hear unsecured debts grouped simply as priority and nonpriority, priorities are ranked. That is, the first-priority creditor claims are paid first, then second priority, and so on. Nonpriority unsecured claims come behind the lower-ranking priority claims.

Domestic support obligations, including child support, top the list. Administrative costs of the bankruptcy trustee and certain other administrative expenses necessary to preserve the bankruptcy estate follow.

Many of the other types of unsecured debt the U.S. Bankruptcy Code prioritizes donât apply to most consumer bankruptcy cases. For example:

  • Payday loans

  • Other unsecured personal loans

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What Every Unsecured Creditor Should Know About Chapter 11

Chapter 11 – 101Journal Article: Editor’s Note:This month, we address issues of concern to unsecured creditors of a chapter 11 debtor. By paying attention to the issues discussed below, an unsecured creditor can guard against unnecessary pitfalls, assert and effectively monitor its claim and maximize the amount of its recovery.

Creditors in a bankruptcy case and the priority of payment for their claims are distinguished by the type of claimsthey hold. The Bankruptcy Code sets forth a priority scheme for creditors’ claims in §507. In general, creditorswhose claims are secured by assets of the estate are in a superior position . Should a chapter 11 debtor fail in its attempt to reorganize, a securedcreditor may generally look to the liquidation of its collateral for payment of its claim .1

The Role of the Unsecured Creditor in Chapter 11

Conversely, all other creditors are dependent on unencumbered assets of an estate for payment. The priority forpayment of these claims is generally as follows: first, costs of administration , followed by a host of unsecured claims thatCongress has determined deserve a special high priority , and finally generalunsecured pre-petition obligations. By virtue of their last-in-line position, general unsecured creditors might beviewed as having the most to lose should a chapter 11 debtor’s reorganization fail. It is for this reason thatunsecured creditors may be most benefited by a thorough monitoring of the debtor’s affairs during the case.

What Is A Claim By Creditors Of The Bankruptcy Estate

What Is An Unsecured Claim In Bankruptcy

A claim is a notice to the trustee of the debtors estate that the debtor owes a fixed amount to the claimant. Claimants are creditors of the estate. For liquidation bankruptcies and personal reorganization bankruptcies, creditors of the estate must submit a proof of claim within a specific period of receiving notice of the bankruptcy filing. A creditor that fails to file a claim against the estate is barred from later collecting that debt if the bankruptcy filing proceeds to discharge of the debtor. Below are several important aspects about claims against the bankruptcy estate:

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How An Unsecured Creditor Works

It’s uncommon for individuals to be able to borrow money without collateral. For example, when you take out a mortgage, a bank will always hold your house as collateral for the loan in case you default. If you take out a loan on an automobile, the lender will secure their debt with your car until it’s fully paid off.

One exception wherein money is borrowed without collateral is large corporations, which often issue unsecured commercial paper.

Here’s How Your Unsecured Debt Like Credit Cards And Medical Debt Is Treated In Chapter 13 Bankruptcy

By Cara O’Neill, Attorney

Most Chapter 13 filers don’t pay much toward unsecured debt, such as credit card balances, medical bills, cellphone bills, utility balances, and personal loans. If, however, the unsecured debt falls into the priority debt category, like recent tax balances and domestic support obligations, you’ll pay the entire amount in full.

Read on to learn about the differences between secured, unsecured, and priority debt, which unsecured debts you’ll pay in full, and how to calculate the amount of general unsecured debt you’ll pay through your plan.

Find out more about Chapter 13 Bankruptcy.

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How Are Unsecured Claims Treated In Bankruptcy

It was a difficult decision, but you’ve come to terms with it. After months of wading through overdue notices and watching your paychecks shrink, you’ve declared bankruptcy. But hitting the restart button on your financial affairs also launched a confusing process, one that has you struggling to understand how different types of debt are classified under the federal bankruptcy code. For example, unsecured debt — also known as a “claim” — is handled differently than secured debt.

An unsecured claim is one that isn’t secured by collateral the credit was offered to you based only on your future ability to pay. Or, you agreed to pay for services without also agreeing to put up collateral to receive those services. For instance, you may owe $10,000 in medical bills to a local hospital. While the hospital has a right to collect that money from you, it doesn’t have a right to specific property you own. In other words, it can’t repossess your car to pay your medical bills. Instead, the hospital must bill you for the balance and, essentially, hope that you pay. Other types of common unsecured debt include and personal loans .

Claims such as child support and tax debts are unsecured priority claims, so they can’t be discharged in a bankruptcy. Even after your bankruptcy is complete, you’ll still need to pay these debts if there is a balance. However, under Chapter 13 you can set up a repayment plan that can last up to five years.

Reasons Why It Takes So Long For Payout Recovery In Ch11 Bankruptcy

What Should You Do When You Receive a Notice to File Claim in a Customer’s Bankruptcy?

9 Min Read

Learn about the biggest factors and bankruptcy court procedures that impact Creditor timelines for recovery.

The Chapter 11 Bankruptcy process case can be broken down into two phases: the pre-confirmation phase and the post-confirmation phase. The marker that separates the two is a mandatory step in any successful Chapter 11 Bankruptcy case, which is the court-approval of the Plan of Reorganization.

The vast majority of the court deliberations, proceedings, and litigation take place in the first pre-confirmation phase leading up to the formation and approval of the Plan of Reorganization and therefore, consumes much of the Ch.11 case timeline. Once the Plan of Reorganization is court-confirmed, the Debtor in the post-confirmation phase must implement the Plan in its restructuring efforts and resolve claims with Creditors, prior to exiting Chapter 11.

Overall, the timing of each phase varies from case to case and is dependent on the legal and capital structure of the Debtor, the Plan proposed, the litigiousness of the proceedings, negotiations with Creditors Committees, and the Creditors acceptance of the Plan.

While understanding the general bankruptcy process is helpful, the intricacies of certain steps in its legal procedures will help shed light on why the bankruptcy claims timeframe to resolve a Creditors claim is so uncertain.

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How We Can Help

If you’re drowning in debt, we’re here to help. At Steffens Law Office, our experienced bankruptcy attorneys can prepare your case in a way that maximizes your exempt assets. This will allow you to eliminate unsecured debt while protecting as much of your property as possible. Call our office today to schedule a free, no-obligation initial consultation.

Start Your No-Obligation Case Analysis

You Must List All Claims In Bankruptcy

It’s common for someone to want to omit a claim from the bankruptcy paperwork for one reason or another. You can’t do it. You’re required to list all claimsboth the claims you think you owe, and those others think you owe.

It’s in your best interest to do so. If you fail to list a claim, the claim might not be erased in your caseeven if it qualifies as a dischargeable debt.

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What Will Happen To Secured Debts And The Property Attached To Them

If your creditor does have a secured debt, they will get paid in some way.

While the bankruptcy can discharge your debt due, it will not remove the lien. Instead, you are just no longer liable for the debt itself. The lien, however, gives the creditor rights to the property or collateral.

Therefore, if you want to keep the secured debt property, you must continue making payments on those debts. When you have significant property attached to secured debts, Chapter 13 may be the better option instead of filing for Chapter 7. With Chapter 13 bankruptcy, you will restructure and create a court-approved repayment plan. This means, instead of discharging your debts, you are paying them off. Often, you will pay less than the original amount on unsecured debts, too.

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    Priority Claims Vs Non

    Unsecured Creditors with a priority claim are not secured by collateral, however they are treated with higher priority over other claims by Federal law. A priority claim is debt that is entitled to special treatment in the bankruptcy process and will get paid ahead of non-priority claims.

    These might include bank lenders, employees, the government if any taxes are due, suppliers, and investors who have unsecured bonds. This class of bankruptcy claims are dependent on unrestrained assets of a bankruptcy estate for payment. This class of claims typically carry priority for public policy reasons, and thus under law are required to be paid out as a matter of priority to fulfill their special obligations. For instance, priority claims may include: employee compensation owed, unpaid tax obligations, and accounting and legal costs for administering the bankruptcy case.

    Unsecured creditors with non-priority claims, otherwise known as general unsecured claims, are debts that possess no priority and are not supported by any secured interest or collateral in the Debtors bankruptcy estate. These types of bankruptcy claims might include credit card debts, student loans, personal loans, or utility and medical bills. Non-priority unsecured creditors have the lowest position in the priority scheme.

    Types Of Creditor During Bankruptcy And Special Considerations

    That covers most of the debts youre likely to have when you file for bankruptcy in Canada however, there are some instances where special rules apply:

    In the case of tax debts, while they get treated like any other form of unsecured credit that can change if before you filed, the government registered a lien against your home or property.

    That applies with income tax, HST debt, and other tax liabilities you may have.

    Student debt generally gets treated as unsecured during bankruptcy however, its important to be aware that special conditions apply.

    Before you can get discharged from bankruptcy in Canada with student debt, youll need to fulfil the requirements of specific rules.

    Co-signers and guarantors can find themselves in a precarious position when you file for bankruptcy.

    While once you enter the process, you are no longer responsible for any debts of this type guarantors will be required to pay.

    When you and your co-signer took on the debt, you both agreed to be responsible for it.

    Even after your bankruptcy, a lender is within their rights to pursue collection action against a guarantor.

    The co-signer is liable until the debt gets paid in full.

    That collection activity can include both wage garnishment and lien registrations.

    Dont weigh up your options alone get the advice you need

    Here at BankruptcyCanada, weve helped thousands of Canadians over the years to navigate their journey through bankruptcy.

    You dont need to figure everything out on your own.

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    When The Claim Amount Isn’t Straightforward

    Sometimes the amount you owe to a creditor isn’t easy to figure out. Perhaps the amount you owe could depend on what someone else does or might not be determined yet. Or, you and the creditor might disagree as to how much you owe.

    If any of these is the case, you’ll indicate it when listing that claim on your bankruptcy papers .

    Here’s what each term means.

    Secured Debt In Bankruptcy

    Creditors Submit Proof of Claims to Bankruptcy Estate

    This type of obligation is guaranteed by property known as “collateral.” The debt contract gives the lender an ownership interest in the collateral called a “lien.” The lien remains until the borrower repays the loan. If the borrower defaults on the loan, the lender can use the lien rights to recover the property.

    Here are some examples of secured debt.

    • A homebuyer agrees to put up the house as collateral for a mortgage.
    • A car loan with a clause giving the lender the right to take the car if the borrower doesn’t pay.
    • A business loan in which the company property serves as collateral.

    If a creditor has a lien on your property, then you owe a secured debt. The creditor has a secured claim.

    A Secured Creditor’s Rights in Chapter 7

    Because the secured creditor has a payment mechanism in place, if money is available to distribute to creditors, a secured creditor won’t get a part of it. The secured creditor already has a payment mechanism in place. Specifically, the remedy is to recover the propertyusually through foreclosure or repossessionand sell it at auction. A secured creditor will have to wait until the bankruptcy is over or file a successful motion to lift the automatic stay.

    Your Secured Debts in Chapter 7

    You must indicate whether you plan to keep or surrender any property securing a claim, like your financed car, house, or any other property with a lien on it. When you surrender it, you give it back to the creditor.

    Secured Debts in Chapter 13

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    What Is A Proof Of Claim

    At the commencement of a bankruptcy case, the debtor is required to provide a list of all assets and debts to be included in the estate. The debtor must also identify all creditors holding these debts. Creditors are then given notice of the debtors bankruptcy case with instructions on how to submit a claim. Creditors must then submit a proof of claim attesting to the court the nature and amount of the claim. If a creditor submits a secured claim, she must include evidence of a security interest. Creditors in Chapters 7 and 11 bankruptcies must file the proof of claim within 90 days of learning of the bankruptcy case. In Chapter 11 cases, the court will establish a bar date by which creditors may file a proof of claim but, filing a proof of claim is not necessary to receive a distribution from the debtors estate. All creditor claims are generally allowed, unless the claim is challenged by the debtor, trustee, debtor-in-possession or by other creditors.

    Note: In some cases, unsecured creditors may request the court appoint a creditors committee to represent their collective interests and communicate with the debtor in possession.

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