Both debtors and creditors have rights related to the lending relationship, and that is as true during bankruptcy as it is any other time. The type of right a creditor has to payments during a bankruptcy proceeding depends both on the type of bankruptcy and the type of creditor. Generally, there are three categories of creditors, each with a different priority for payment.
One type of creditor is any lender with a lien on a person’s property. A lender providing money for a mortgage or car purchase, for example, holds a lien against that property until the debt is paid. These are liens that arise through the lending contract — other liens might be created by judicial proceedings or through legal statutes. Usually, these creditors must be paid or agree to settle so the debtor avoids losing property.
A second type of creditor is one who has a priority interest through legal statutes. Debts that are owned to priority creditors must be paid during bankruptcy before other debts; one example of a priority debt would be money owed to the IRS.
A third type of creditor doesn’t have a priority or a lien. Examples of this type of creditor include credit card companies.
When dealing with a bankruptcy situation, you must understand your entire debt picture. That means listing all debts and creditors as well as understanding the types of loans and creditors with which you are dealing. These details are what let you and the court work together on a bankruptcy plan that is as positive for all involved as possible. The point of bankruptcy is to provide a clean financial slate, but you also have to pay creditors when possible.
Source: Bankruptcy Data, “Glossary of Common Bankruptcy Terms,” accessed July 17, 2015