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Stacy B Miller (Abbie) On 4th Apr,16
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How bankruptcy treats Priority debts?

Debts are debts - No matter who owes whom, one needs to pay them off to regain their peace of mind. Well, some debts are marked as ‘priority’. Do you want to know why?

Why debts are termed as ‘priority’?

‘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 an individual 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.

Which debts are dubbed with the ‘priority’ status?

Section 507 of the Bankruptcy Code points out which conditions mark a debt to be ‘priority’. Since, all debts can’t be specified as priority, and the precedence of such debts vary from person to person. The following liabilities are granted the ‘priority’ status:

  1. Domestic support obligations, which include alimony and child support
  2. Administrative expenses, comprising of items like the trustee’s costs and commissions for Chapter 7 bankruptcy, the attorney fees for Chapter 13 etc.
  3. Claims for recent wages
  4. Employee benefit contribution claim
  5. Specific agriculture storage claims
  6. Certain post-petition claims in involuntary cases which can’t be determined initially
  7. Claims for specific goods which were not delivered and services which were not provided
  8. Depository agency claims related to capital commitments
  9. Claims for personal injury or death due to DUI conduct
  10. Certain taxes

However, the importance of the debts is specific to each individual. Thus, some of the above mentioned debts can’t be considered as priority, since they aren’t relevant to most individuals. The common priority claims includes taxes, administrative expenses, child support and alimony, DUI injury compensations.

How Priority Claims are treated during bankruptcy?

Depending on which form of bankruptcy has been filed, whether it’s Chapter 7 or Chapter 13, the priority debts are treated differently.

Chapter 7 Bankruptcy

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.

Chapter 13 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 needs to approve Plan Payment and see to it, that the debtor has adequate income to make the payments.

What is the difference between priority debts and non-dischargeable debt?

Priority debts and non-dischargeable 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, priority status of a debt makes it non-dischargeable.

Under a 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.

Last Updated on: Mon, 4 Apr 2016

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