Chicago Bankruptcy Question: What is an unsecured creditor and how are they treated in Chapter 7?

Chicago Bankruptcy Question of the Day: What is an unsecured creditor and how are they treated in Chapter 7?  When you file for Chapter 7 bankruptcy protection in Chicago you are required to disclose and schedule all of your creditors.  The creditors are broken down into categories, which include secured creditors, priority creditors and unsecured creditors.  The first two were addressed in prior Chicago bankruptcy question of the day blog entries, so now we will address unsecured creditors.

In bankruptcy, an unsecured creditor is one to whom a debt is owed, where there is no collateral securing the debt and where the U.S. Bankruptcy Code does not provide for any special treatment of the debt.  The most common types of unsecured creditors are credit cards, medical bills, personal loans, payday loans, parking tickets, student loans, past due utility bills and overpayments of benefits.  These are also the debts that usually drive people into filing for Chapter 7 bankruptcy protection in the first place.

Once you file your Chapter 7 bankruptcy, all of your creditors are given notice of the filing, an opportunity to appear at your section 341 Meeting of Creditors, and an opportunity to object to your bankruptcy discharge.  Unless the Bankruptcy Code specifically excepts a debt from discharge, or a creditor successfully objects to the discharge of their debt, then all unsecured creditors are discharged at the end of your bankruptcy case.  Since there is no collateral attached to the debt, and assuming that there is not a co-debtor liable for the debt, these debts are basically eliminated by operation of law by the bankruptcy discharge.

The U.S. Bankruptcy Code specifically excepts a variety of non-priority unsecured debts from discharge in Chapter 7.  The most common of these are student loans and tuition (in most cases), governmental fines (including parking tickets and toll violations), and debts that could have been included in a prior bankruptcy filing.  These debts (and others that are less common), with extremely limited exceptions, are non-dischargeable by law and will not be significantly impacted by your bankruptcy filing. 

Other debts may be determined to be non-dischargeable by the court, but require an objection to be filed by the creditor seeking a non-dischargeable status and an order from the court.  The most common objections to discharge of a specific debt in Chapter 7 bankruptcy in Chicago are for debts allegedly incurred by fraud or misrepresentation, debts allegedly incurred due to the willful and malicious acts of the filer and debts for overpayments of governmental benefits (unemployment, social security, public aid, etc.).  These objections are often fiercely litigated in the bankruptcy courts, as a negative result of the litigation can often obviate the need for the Chapter 7 bankruptcy filing.

If you are considering filing for Chapter 7 bankruptcy in the Chicago area, be sure to seek the advice of an experienced bankruptcy attorney.  While your case may involve nothing but unsecured creditors, this does not mean that it is cut and dry.  The books are full of cases where seemingly simple Chapter 7 bankruptcy cases went bad because of creditor objections or questionable advice of counsel.  The Chicago bankruptcy lawyers at Ledford & Wu have years of bankruptcy experience and are happy to offer you a free consultation regarding your debts, warn you of any potential issues or litigation and help you determine the proper course of action for you.

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