The first thing that happens to property in a bankruptcy is that the trustee collects all of the property that you are not allowed to keep (called nonexempt property).
Next, the trustee sells the property at a public auction. The trustee gives the money from the auction to any creditors. The trustee's job is to try to get the creditors as much money as possible.
Creditors are the people you owe money. There are three kinds of creditors, and they are paid in the following order:
- Secured creditors
- Priority unsecured creditors
- General unsecured creditors
Whatever amount of money is left over after secured creditors and priority unsecured creditors have been paid is divided equally among all general unsecured creditors. They usually only get a small percentage of the amount they are owed.
Secured creditors are creditors who have a security interest in the property. They have the right to get the property back if a debtor does not make payments.
A security interest is what guarantees that a debtor will repay the debt. For example, a mortgage on a house is a security interest. The bank is a secured creditor. If the debtor fails to make the mortgage payments, the mortgage allows the bank to take back the house to pay off the debt.
Some other examples of include:
- A first or second mortgage on a house
- Major appliances
Priority unsecured creditors
Priority unsecured creditors are those that the bankruptcy law favors over other creditors, even though they do not have a security interest in the debtor's property.
Examples of priority unsecured creditors include:
- A spouse, former spouse or child who is owed alimony or child support
- The costs of the trustee in handling the bankruptcy
- Unpaid taxes
General unsecured creditors
General unsecured creditors have neither a security interest in your property nor a priority over other creditors. Common examples include:
- Credit card debt
- Medical bills
- Utility bills
- Most store charge cards
General unsecured creditors get paid last in a Chapter 7 bankruptcy.
Updated: July 2017