Priority debts are ones a debtor must pay first through the bankruptcy process.
The court views these creditors as the most important and treats them as such in forthcoming repayment scenarios. As a general rule-of-thumb, debts are given priority status when a) the creditor is the government, or b) payment to the creditor is for the overall public good, as in cases of missed employee wages or past-due child support payments.
For an individual or business preparing to file for bankruptcy, one of the initial steps is sorting all of your debts into two categories: secured debt (guaranteed by collateral) and unsecured debt (not guaranteed). The court will then further classify the creditors from the unsecured list as priority and non-priority. The priority debt will jump to the front of the line for repayment, while some of the non-priority debt will be discharged.
Common priority debts:
- Salaries, wages, or commissions owed to an employee
- Contributions to an employee benefit plan
- Spousal support, maintenance, or alimony
- Child support
- Income tax claims within 3 years (it’s more complicated, but this is the starting rule)
- Non-dischargeable tax claims – ex. sales or withholding tax claims.
- Payments to farmers and fishermen.
Common nonpriority debts:
- Credit card balances
- Medical debt
- Back rent
- Utility bills
- Taxes older than 3 years with timely filed tax returns (it’s more complicated, but this is the starting rule)
- Student loans (though they are generally non-dischargeable)
- Unsecured personal loans
Most priority debts are not dischargeable.
These are the ones that will not be wiped clean through bankruptcy; at some point they must be paid. How that happens depends on how you file.
In a Chapter 7 case with assets to sell, any priority debts remaining after the Trustee’s payout will still be owed by the debtor. If the funds are sufficient to pay all priority debts, any funds left over will be distributed among the non-priority, dischargeable debts. If there are no funds leftover, these creditors won’t receive anything. In Chapter 7 cases where assets are either exempt or do not cover the priority debts, a debtor might find themselves with non-negotiable debt left unpaid. Chapter 7 cases are short – typically just 4-6 months. Outstanding priority debts at the end of this term can be a problem for the debtor, creating a scenario where they cannot get their case discharged and have not escaped the financial burden.
In Chapter 13, the priority debts are paid back, sometimes with interest, through a 3 to 5 year income-based repayment plan. Payments must be up to date and complete at the end of the term to receive a discharge. A lawyer can assist with arranging a payment plan that considers all the factors, avoids hidden pitfalls, and sets you up for success.
Bankruptcy removes most debts that are not priority debts.
The good news is that some of the debt you’ve acquired can be removed. The non-priority debt is often paid back with pennies on the dollar or even outright discharged. A debt relief agent can help you navigate the nuances of bankruptcy court, ensuring you get the best possible solution entitled to you by law. Contact our offices today for help in deciding if a bankruptcy case might be right for you.
The Law Offices of Jeffrey Lohman, P.C. is considered a debt relief agency pursuant to federal law. We are attorneys who help people file for bankruptcy relief under the Bankruptcy Code.