Debts are debts. No matter who owes whom, one needs to pay them off to regain peace of mind. Well, some debts are marked as ‘priority’. Do you want to know why? Let’s find out.
‘Priority debt’ is more like a jargon, a term that has cropped up due to bankruptcy. Individuals often do away with their unsecured debts in bankruptcy. Certain debts are allowed the ‘priority’ status so that individuals filing bankruptcy cannot just erase all their financial obligations. The priority debts are deemed more important than others and have to be paid for. If those are not paid, the individuals who owe the money can sue the debtor.
Section 507 of the Bankruptcy Code deals with priority debts. This is because all debts can’t be specified as a priority, and the precedence of such debts vary from person to person. As per the Federal Bankruptcy Code, the “priority claims” are divided into the following 10 categories with decreasing order of priority:
Every category of priority creditors must be paid in full before the next category of creditors can receive their payment. Normally, unsecured creditors receive the lowest priority. If there is not enough money left to pay a priority category in full, then all the members of that category receive a pro-rata share of the leftover.
There are 2 exceptions to the pro-rata distribution within a priority category:
State laws can neither modify the priority of claims nor can disregard the priority order. Even, the courts are not empowered to modify the order under normal circumstances. However, some specific types of payments are granted a de facto priority by the courts. These are usually prioritized to achieve some legal solutions, such as resolving conflicting legal objectives, paying the trustee to oversee the bankruptcy case, and so on.
Depending on which form of bankruptcy has been filed, whether it’s Chapter 7 or Chapter 13, the priority debts are treated differently.
Priority debts determine which of the unsecured debts on the individual’s list has to be paid first. Having priority status is important for the creditors since an individual filing Chapter 7 will not have sufficient funds to pay all the debts or even for all the priority debts. Consequently, the rest of the arrears on the priority list and the general unsecured debts are discharged. Child support, alimony, or income tax claims are thus paid before the credit card bills in Chapter 7 bankruptcy.
All of the priority claims are paid-in-full by an individual opting for Chapter 13. The creditors having the priority debts are often entitled to higher premiums and the payment plan of the debtor is set accordingly. However, the court and the standing trustee need to approve the payment plan and see to it that the debtor has adequate income to make the payments.
Priority debts and non-dischargeable debts are often confused, since most of the time, they overlap each other. Debts enlisted with the ‘priority’ status have to be paid in the bankruptcy or else discharged. The non-dischargeable debts have to be paid even after the bankruptcy, i.e. they survive the bankruptcy. Nevertheless, under certain circumstances, the priority status of debt makes it non-dischargeable.
Under Chapter 7, the creditors, having priority claims, only get paid if the individual has assets. Large priority claims may drive up the total payments under Chapter 13.