When a person fills out Schedules D, E, and F of the bankruptcy forms, she has to categorize her debt so that it gets put on the correct schedule. In order to do that, she must know the differences between secured, priority and unsecured debt.
Secured debt goes on Schedule D. A debt is secured when the creditor has some property (called collateral) that the creditor can take by way of repossession or foreclosure without first suing the debtor. Examples of secured debt are car loans (the bank holds title to the vehicle, which allows it to repossess the car) and mortgages (the bank has a mortgage under which the borrower gave the bank permission to foreclose on the mortgage and sell the house at auction). Anything can serve as collateral for a secured debt.
The thing that differentiates secured from unsecured debt is a voluntary agreement made by the debtor (called a security agreement) that pledges the property as collateral. If a debtor doesn’t know whether a debt is secured or not, the way to find out is to look at what contracts the debtor signed when she purchased the goods.
One exception to this is in-store credit cards. If a person has a Best Buy or R.C. Willey credit card and uses that to purchase merchandise from these stores, the agreement the person signed when he opened the account says that anything that is purchased using the card automatically becomes collateral for all debt on the card.
This means that the TV someone purchased three years ago using an in-store card is still collateral for later purchases.
To be secured, a debt must be secured by property that the debtor owns. Debt can be secured in general, but not secured as far as a specific debtor is concerned. For example, suppose the debtor co-signed on a car loan for her sister. That debt is secured as far as the bank and the sister are concerned, but because the collateral is the sister’s car, not the debtor’s, that debt is unsecured in the debtor’s bankruptcy. That debt would not go on Schedule D.
Major credit cards like Visa, MasterCard, Discover, and American Express are not secured. Those debts would not be listed on Schedule D.
Priority debt is debt that is given payment in bankruptcy under the Bankruptcy Code, meaning if the trustee has any funds from which to make a payment, these debts get paid first. Back taxes of any kind and domestic support obligations (child support, alimony, money owed for property settlement) are the most common types of priority debt. These debts are listed on Schedule E.
Sometimes called general, unsecured debt, these debts are everything else. If a debt doesn’t fall under secured or priority, it is general, unsecured debt, and is listed on Schedule F. This includes all credit cards (except, possibly, in-store cards), medical bills, trade accounts, money owed to service providers such as plumbers, and the like.
Some debt that began as secured might be unsecured by the time the debtor files bankruptcy. This can happen if the collateral has been repossessed or foreclosed on, but a balance remains. Often the bank will repossess a car, for example, sell it at auction, and a balance will remain owing. The car loan started as secured but once the bank repossessed and sold the car, the collateral disappeared, and the remaining debt is unsecured.
If a debtor has judgments entered against her, the judgment is usually an unsecured debt, but it can be secured. Once a creditor gets a judgment, he can collect on the judgment in a number of ways. One way is to attach, or seize, property that the debtor owns. This is done by a court order called a writ of attachment, that is entered with respect to certain property owned by the debtor.
When a writ of attachment is entered, the judgment debt becomes secured by the property attached, converting it from an unsecured debt into a secured debt.
Another way a judgment can become secured is through a judgment lien. Under state law, a judgment can become a lien (similar to a mortgage or security interest) on property. In Utah if a judgment is recorded with the County Recorder, that judgment becomes a lien on any real property owned by the debtor in the county.
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