There are two types of debts in a bankruptcy case:
- Dischargeable.
- Non-dischargeable.
There are also two categories of non-dischargeable debts:
- Debts that are non-dischargeable according to statute
- Debts that must be determined by the court to be non-dischargeable
Debts may be secured or unsecured. A debtor (you) may reaffirm a debt if it is in his or her best interest to do so.
Secured debts
A secured debt is a debt upon which a lien or other evidence of collateral is attached to the property. The creditor is entitled to the amount of the lien, and if the value of the property is less than or equal to the amount of the lien, the creditor may take possession of the property. If the value of the property is more than the lien on the property, the excess may be paid to the creditor for interest, fees or other charges provided for under the agreement between the creditor and debtor. If all of the creditor’s fees have been paid, the trustee is entitled to fees and costs for preserving or disposing of the property.
If the debtor is an individual Chapter 7 or 13 debtor, the value of secured personal property is determined by replacement value as of the date of filing the petition without considering the costs of sale or marketing. For property acquired for personal, family, or household purposes, replacement value means the price a retail merchant would charge for the property considering its age and condition.
For example, a debtor purchased furniture on credit for $3,000 and the furniture secured the debt. At the time of bankruptcy, the debtor still owed $2,000 on the contract, but the replacement value of the furniture was only worth $1,500. The debtor may allow the creditor to repossess the furniture or pay the creditor $1,500 to keep the furniture (the replacement value of the furniture). The remaining $500 on the contract becomes an unsecured debt and is dischargeable in the bankruptcy proceedings. If the furniture was worth more than the claim ($2,500), the creditor may take the furniture and apply the excess to his or her costs of managing the claim, including interest on the debt and other fees provided for under the agreement. The debtor and creditor will have different opinions as to the value of secured property. If the dispute cannot be resolved, the court will determine the value of the property upon notice and motion of any party.
If a lien secures a claim that is not an allowed secured claim, the lien is void unless it is an unmatured claim for domestic support obligations, or it is disallowed because the creditor failed to file a proof of claim.
Unsecured debts
Unsecured debts are debts that are not subject to a lien or encumbrance.
Nondischargeable debts
Debts that are non-dischargeable according to federal statute are:
- Taxes that are entitled to priority, including any debt incurred to pay the tax.
- Debts where money, property or services were obtained by false pretenses, fraud or false financial statement.
- A debt owed to a single creditor for luxury goods or services that aggregate more than $600 incurred by the debtor within 90 days before the order for relief, or cash advances that are extensions of credit in excess of $875 incurred by the debtor within 70 days the order of relief.
- A debt that is not listed on the schedule of liabilities in time to permit a timely filing of a proof of claim, unless the creditor had actual knowledge of the case in time for such filing.
- A debt arising from fraud, embezzlement or larceny while acting in a fiduciary capacity.
- Domestic support obligations.
- Debt arising from the debtor’s willful injury to a person or property of another.
- Debt for a fine or penalty payable to a governmental agency for nonpayment of a tax if the tax imposed is determined to be non-dischargeable and was incurred three years prior to filing a petition.
- Governmental or non-profit student loans, if the court finds that the repayment of the loan would not impose a hardship on the debtor and the debtor’s dependents.
- A debt arising out of a judgment against debtor for death or personal injury of another resulting from debtor’s operation of a motor vehicle or aircraft while intoxicated.
- Debts owed in a previous bankruptcy proceeding where the debtor waived or was denied discharge.
- A debt arising from a judgment or consent decree issued by the FDIC or arising from a settlement of a fraud action involving a bank or credit union.
- Debt for payment of an order of restitution or fines issued under the Mandatory Victims Restitution Act of 1996.
- Debt to pay a tax to a governmental unit, other than the United States, that would be non-dischargeable.
- A fine or penalty imposed under Federal election law.
- A debt to a spouse, former spouse or child incurred to pay obligations of a divorce or separation agreement other than child and spousal support unless the court determines otherwise.
- Fees owed to a membership association for debtor’s interest in a dwelling or condominium for the period the debtor owns the unit after the order for relief.
- Filing fees for filing a complaint, motion, or appeal and costs related to filings by a prisoner.
- Debt owed to a pension or profit sharing plan under certain sections of the Internal Revenue Code.
- A debt owed for the violation of any Federal Securities laws.
- A debt owed to a creditor that the court, upon hearing, determines to be non-dischargeable.