Secured? Priority? Unsecured? What are these types of debts?

Bankruptcy is designed to provide relief from debts. However, all debts are treated the same. While what might happen to any given debt can become a very fact-particular inquiry, there's a few categorizations that are very basic to understanding the bankruptcy process.

Secured Debt

A secured debt is one where the creditor has a claim to collateral. In other words, the borrower has pledged some particularly property as additional assurance of repayment. Non-payment has the risk of loss of the collateral through repossession or foreclosure. Common examples include mortgages and car loans. Sometimes, people purchase appliances or equipment using secured loans. Less frequently, someone might pledge particular property he or she already owns to secure a loan.

A secured debt combines a personal obligation to pay with a lien obligation against property. Even a secured debt can have its associated personal obligation wiped out by bankruptcy. However, if a borrower wants to keep collateral he or she must also resolve the matter of the lien obligation. In chapter 7, routes exist to keep the debt current and pay the lien off on its contractual terms, with limited options to avoid certain kinds of liens or buy-out collateral by redemption. In chapter 13, a debtor might pay-off the secured loan, cure the default on the loan, avoid certain liens, or sometimes modify the loan or strip-down its lien.

Unsecured Debt

Simply speaking, all debts that aren't secured by collateral are unsecured debts. This commonly includes things like credit cards, medical bills, old utility bills, personal loans, contract debts, student loans, tax debts, alimony, and so forth. However, not all unsecured debts are treated the same way. The first important distinction is between priority unsecured debt and general unsecured debt. This distinction is about payment in bankruptcy.

Priority Debt

The bankruptcy code lists particular sorts of debt as being "priority". For most individual cases, the two most important priority categories are recent tax debts and domestic support obligations (alimony and child support). In chapter 7, priority debts are paid first before general unsecured debts, to the extent the trustee has money to make payments. In chapter 13, the chapter 13 plan must generally provide that each priority claim be paid off in full over the duration of the plan.

General Unsecured Debt

Any unsecured debt that isn't entitled to priority payment in bankruptcy is a general unsecured debt. These claims are paid last on a funds-available basis. In many consumer bankruptcy cases, nothing is ever paid to general unsecured creditors.

Non-dischargeability

It's important to note that the foregoing groupings (secured, unsecured, and priority) aren't controlling on whether or not a particular debt is discharged in a bankruptcy case. A different set of rules control what debts survive as personal obligations of the debtor after the bankruptcy closes with a discharge. Priority is about payment in bankruptcy while dischargability is about payment after bankruptcy. Many priority debts are also non-dischargable. However, there are several types of general unsecured debts that also may be nondischargable, including items like student loans, fraud debts, and martial property settlements.