When you file for bankruptcy, the debts you owe to creditors are called “creditor claims.” And not all claims receive the same treatment.

Both the filer (debtor) and creditors identify claim types using legal terminology. The labels help the bankruptcy trustee appointed to the case determine how to pay creditors when money is available for distribution.

Creditor Claim Types

A trustee needs to know a few things before making payment, including:

• Is the claim backed by collateral? A claim is either secured by collateral (for instance, a mortgage or car loan), or unsecured (a medical bill or credit card balance).
• Can the claim be paid now? Any claim labeled contingent, unliquidated, or disputed isn’t ready for payment.
• Should the claim move to the head of the line? A priority unsecured claim gets paid before other unsecured claims.

The terms described are explained in further detail below. Both the debtor and creditors use the terms when filing out various forms.

How a Debtor Lists a Claim in Bankruptcy

When disclosing debt on the official forms, the first thing a debtor must do is sort claims into two categories:

• secured claims, and
• unsecured claims.

The debtor then lists each claim on the appropriate form as follows:

• Secured claims. These claims go on Schedule D: Creditors Who Have Claims Secured by Property. A secured claim is guaranteed by collateral (property). If the debt isn’t paid, the creditor has the right to take and sell the collateral. This ownership right creates a lien on the property. Examples of voluntary liens include a security interest in real estate, or personal property, such as a car, truck or machinery. A taxing agency or a court's lawsuit judgment can create an involuntary lien.
• Unsecured claims. The debtor lists all other claims on Schedule E/F: Creditors Who Have Unsecured Claims. A claim that isn’t backed by collateral is unsecured. Credit is extended solely on an assessment of the borrower's ability to pay. A credit card balance is a good example.

It's possible for a claim to be partly secured and partly unsecured. For instance, a creditor's lien might be less than the full amount of the debt, or the property might be worth less than the full debt owed.

When a Claim Needs More Information

Not all claims are ready for immediate payment. If more information is necessary, or something needs to happen before a debt comes due, the debtor will alert the trustee and creditors by labeling a secured or unsecured claim as either:

• contingent
• unliquidated, or
• disputed.

Here’s what each term means.

• Contingent claim. This type of claim is owed only if a certain condition occurs. For instance, a debtor might be a loan co-signer who is required to pay only if the borrower doesn't make the loan payments. A contingent debt is one in which there is a triggering event for the debt to exist but all the events needed to create liability haven't happened before the filing of the bankruptcy petition.
• Unliquidated claim. The amount owed on this type of claim hasn’t yet been determined. For instance, suppose the filer is getting sued for injuries related to an automobile accident, but the action is still going through the court system. The amount of the claim will remain unliquidated until the related lawsuit is completed, and a judgment for damages entered against the debtor.
• Disputed claim. A disputed debt is one that you don't agree you owe to the creditor. If you agree to the amount, the debt is undisputed.

When a Claim Is Entitled to Payment Priority

Both debtors and creditors must indicate whether an unsecured claim is a priority claim entitled to payment before others. Priority unsecured claims include:

• administrative expenses (allowed expenses incurred by the trustee)
• domestic support obligations (alimony and child support)
• deposits toward the purchase, lease, or rental of property or services for personal, family, or household use (up to a fixed amount)
• wages, salaries, or commissions earned within 180 days before the filing (up to a fixed amount)
• taxes or penalties owed to governmental units
• contributions to an employee benefit plan, and
• claim for death or personal injury resulting from intoxication.

When there aren't enough funds to pay all claims in a case, unsecured claims with the highest priority stand the best chance of being paid compared with claims with a lower ranking.

Sorting through these issues can be complicated, and it’s a good idea to seek help from a bankruptcy attorney. A good place to start is by finding out the average cost of filing for Chapter 7 and Chapter 13 bankruptcy.

How a Creditor Asks for Claim Payment in Bankruptcy

When money is available, the trustee sends out an asset case notice and gives creditors a deadline in which to request a portion of the funds. Creditors ask for claim payment by completing a Proof of Claim (Form 410).

On the Proof of Claim, the creditor must prove that the bankruptcy filer owes the debt. The form asks for information about the type of debt, the amount owed, and the creditor’s right to payment.

A creditor's right to payment can come from many sources, including contracts or a court's judgment. For example, someone could break a contract term, or fail to perform some duty owed to a creditor, and a court awards a payment to the creditor. The creditor must attach a copy of the contract or document that gives the creditor the legal right to collect the claim.

When labeling the claim type, the three primary claim categories on the Proof of Claim form include:

• secured claims
• unsecured claims, and
• priority unsecured claims.

Paying Priority and General Unsecured Claims

After the trustee has all available funds together and has reviewed the claim forms, the trustee will sort the unsecured claims into:

• priority unsecured claims, and
• general unsecured claims.

The trustee must pay priority unsecured claims in full before making payments to unsecured creditors. For instance, qualifying income tax balances will be paid before a medical bill.

Paying Claims in Chapter 7 and 13

While trustees follow the above rule, from a practical standpoint, claim payment is a bit different in each chapter. In Chapter 13, the trustee disperses the funds according to the confirmed (approved) repayment plan. Payment might be made to both secured and unsecured creditors, depending on the plan and the rules of the jurisdiction.

In Chapter 7, the trustee is primarily responsible for liquidating property and paying unsecured claims, such as credit card balances, child support, medical bills, and the like. The Chapter 7 trustee pays a secured creditor claim only if it makes sense to sell the collateral (and it would make sense only if after the sale, funds would remain to pay unsecured creditors).

Example. The debtor owns a house worth $300,000. The debtor can protect $50,000 with a bankruptcy exemption, leaving $50,000 in equity to pay creditors. The trustee will sell the home, pay off the $200,000 mortgage, give the debtor the $50,000 exemption amount, and use the remaining balance to pay unsecured creditors.

After the trustee pays all priority unsecured claims, general unsecured claims will receive a pro rata share of the funds that remain. (The priority payment system is discussed above.)

Time to File a Proof of Claim

Filing claim times differ based on whether the debt is owed to a government or nongovernment creditor. The time limits are as follows:

• Nongovernmental creditors. A nongovernment creditor has 70 days to file a proof of claim after the petition filing date in Chapter 7, 12, or Chapter 13.
• Government creditors. These entities must file a proof of claim within 180 days after the bankruptcy filing date.

The particular date will appear in the notice sent out by the bankruptcy trustee.

Objecting to a Proof of Claim

A claim doesn't automatically get paid. A trustee, creditor, or debtor who disagrees with the claim can file an objection with the court. The dispute will be resolved by a judge on the submitted paperwork or at a hearing. Learn more in How to Object to a Creditor's Claim in Bankruptcy.