Understanding your debt categories and bankruptcy in Ohio.

Bankruptcy is a legal process for a debtor to either resolve, restructure, or reduce their debt to creditors. The bankruptcy process can be completed several different ways. The main contingency on how bankruptcy is handled is whether the debt is secured, priority, or general unsecured.

What Does Categories Of Debt Mean?

Debt has three legal categories:

1. Secured
2. Priority
3. General unsecured

The category of debt determines both the creditor’s rights and the debtor’s rights and responsibilities. Which category of debt is involved will determine the answer to questions such as:

• Will bankruptcy wipe the slate clean of all debts?

• What becomes of debts like child support or taxes that can’t be written off?

Can certain debts, such as for a home or vehicle, be continued to be paid in order to keep it?

Understanding The Three Categories Of Debt In Bankruptcy

1. Secured Debts

Secured debts are secured by an asset, which is generally something owned by the debtor or in the process of being owned. It’s typically in the form of being backed up by a lien or some other legal interest of the creditor. A vehicle loan being offered by a lender is a good example. The vehicle’s title will state the lender is the lien-holder, which makes the vehicle loan secured by the vehicle itself. In addition to whatever security agreement is signed at the time of the loan, lien-holding gives the lender rights over the vehicle.

Other times, however, a debtor might not know if the debt is secured. Credit card purchases are good examples. Sometimes, retail store purchases can be secured debts that make the purchase the security. That said, most major credit cards are not secured by the specific purchased item(s.) The original paperwork accompanying the credit card offer and acceptance outlines whether a credit card is secured or not.

If there’s any question on the security status of a credit card, contact an Ohio bankruptcy lawyer. Even if the creditor is saying the debt is secured, it’s still prudent to contact a bankruptcy lawyer in Ohio. Sometimes, a creditor could’ve intended for the line of credit to be secure, but, if they didn’t take the necessary legal steps, it could still be an unsecured debt in which the debtor could retain the property and still file bankruptcy on the debt.

Another caveat is in the debt only being partially or under-secured. A vehicle loan, for example, could be that $11,000 is owed on a vehicle that’s only valued at $5,000. If the vehicle is only secured to its value, then the debtor could still keep the vehicle in bankruptcy without paying the full $11,000 owed on it.

2. Priority Debts

Under the law, certain debts have been given a special priority status in bankruptcy based on how they impact society as a whole. Child support payments, spousal support payments, certain employee wages and compensations owed by an employee, and certain taxes, for example, all have priority status. And, there’s even a hierarchy within the priority debts, ensuring that certain debts get paid first or a higher percentage than other debts.

3. General Unsecured Debts

Debts without a security backing are considered unsecured debts. The classification of general unsecured debt means that it’s neither secured nor a priority debt.

In most cases, the lump of bankruptcy debt will be general unsecured debts like medical bills, credit card bills, personal loans, unpaid utilities, student loans, NSF checks, repossessed vehicle balances, unpaid rent, and other non-collateral debts owed.

Keep in mind, however, that a general unsecured debt can transition into a secured debt. This is often the case after a creditor sues a non-compliant debtor and gains a judgment for a lien against something the debtor owns, such as a home. So, it’s important to contact a bankruptcy lawyer immediately if bankruptcy is a consideration so that Ohio bankruptcy and debt can be thoroughly understood.