When you file for bankruptcy in New York, your debts will become creditor claims. Under bankruptcy law, they are divided into two categories: secured vs. unsecured and, within the latter, priority vs. non-priority. These distinctions dictate which ones get paid first and which ones get paid at all.
What are secured claims?
Secured debts are guaranteed by collateral that the creditor can seize if you default. A common example is a mortgage loan, which is backed by your home. When you can’t make your mortgage payments, the bank can foreclose on the property. Vehicles are another example: falling behind on your car payments can lead to its repossession.
If you are current on your mortgage payments and there is little equity in your home, then you will likely be able to keep it if you file for Chapter 7. If you have significant equity remaining, then you may want to file for Chapter 13, which lets you keep most property in exchange for repaying your debts over three to five years.
Whether or not you will lose your car in Chapter 7 depends on if you can reach an agreement with the lender. You can “redeem” the vehicle by paying the bank its current replacement value (provided you were able to use exemptions to prevent your trustee from seizing it). Another option is to reaffirm the debt by signing a new agreement.
If you file for Chapter 13, then you can keep your vehicle by including the arrears in the repayment plan and remaining current on the monthly payments going forward.
What are unsecured claims?
Unsecured debts are obligations that are not backed by collateral. Examples include credit card bills, medical debt, and utility arrears. These claims have two subcategories:
- Priority: When a claim is a priority one, they cannot be discharged in bankruptcy. Child support, spousal maintenance, and certain tax debts fall into this category. If you file for Chapter 7, then these obligations will survive the filing, although the discharge of non-priority debts will leave you with more money to repay them. If you have a lot of priority debt, then filing for Chapter 13 can help you repay arrears over three to five years.
- Non-priority: This type of unsecured claim can generally be discharged in a Chapter 7 bankruptcy. (The notable exception is student loans, which are technically unsecured debts but rarely dischargeable in bankruptcy.) New Yorkers with a lot of credit card or medical debt and few assets tend to file for Chapter 7 to get the fresh start they need.
If creditors are calling you constantly and demanding money that you don’t have, then a New York bankruptcy attorney can help you identify an approach that is most compatible with your current income and property as well as the amount and nature of your total debt. When you’re seeking a fresh start, legal counsel will help you make the right decision. Jayson Lutzky is a Bronx attorney who handles personal bankruptcy cases and offers free in-office initial consultations. Call 718-329-9500 to set up an appointment. Convenient Saturday hours are available.