Should I Pay Debts Before Bankruptcy?
Oregon debtors must weigh their options before making these difficult decisionsBy Doug Mentes, Esq. | Last updated on January 10, 2023
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The goal for many debtors when filing a bankruptcy case is to obtain a discharge of their debts—often the more debt discharged, the better. Debts are discharged under both Chapter 7 and Chapter 13 bankruptcies. But these are different types of bankruptcy, depending on the two types of debt. Debt is divided into three types under the bankruptcy code:
Secured DebtsThese are debts that are secured by property of the debtor—typically either a house or vehicle. The property that serves as security for the debt is often called collateral. When the debtor borrows money from a creditor in a secured transaction, there are two acts that occur:
- The debtor promises repayment of the money borrowed through a promissory note
- The debtor grants an interest in property through a security agreement
Unsecured DebtsDebts that are not secured by collateral are unsecured. A bankruptcy discharge will eliminate many of these obligations, including credit cards, medical bills, and personal loans. An unsecured debt can become a secured debt if the debtor allows the creditor to obtain a court judgment and record that judgment against the debtor’s real property. Some unsecured debts are distinguished under the law as “priority debts” and are subject to different requirements.
Priority DebtsPriority debts are unsecured debts subject to different rules under the bankruptcy code. These debts are not dischargeable in bankruptcy except in certain circumstances. Priority debts include:
- Income taxes
- Child support
- Spousal/alimony support
- Student loans
Who Gets Paid?It depends on whether a trustee finds assets or income to distribute to creditors. In a “no-asset” Chapter 7 bankruptcy, no creditors get paid, although the debtor is still on the hook for their priority unsecured debts. In a Chapter 7 bankruptcy where a trustee does find non-exempt assets to liquidate, those assets will be distributed pro-rata among the priority creditors. If those assets do not satisfy all priority debts, remaining unsecured creditors receive nothing. However, if those assets do satisfy all the priority claims, the remaining assets will be distributed pro-rata among the remaining unsecured creditors. It is similar if a debtor will make payments under a Chapter 13 bankruptcy plan. Priority debts are paid pro-rata through the three to five years of plan payments. Once priority debts are satisfied, the remainder of the plan payments will be divided pro-rata among unsecured creditors. Determining which creditors to pay or not pay in the months leading up to a bankruptcy filing can be complicated and will involve a debtor making some difficult decisions. A debtor will put themselves in a better position to gain the fullest advantages from their bankruptcy by obtaining advice from an experienced Oregon bankruptcy attorney as early in the process as possible. A law firm or bankruptcy lawyer may offer legal advice on bankruptcy basics and bankruptcy law. For more information on this area of law, see our bankruptcy overview.
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