What Are Priority Debts in Bankruptcy?
Not all debts are treated equally in bankruptcy. Instead, some are considered more important than others, and they go by the name “priority debts.” Many of our clients have debts that the bankruptcy code identifies as “priority,” so our clients should have some idea of what they are and how they are handled. Our South Florida bankruptcy lawyers take a closer look.
Identifying Priority Debts
There are generally three types of debts our clients have in any bankruptcy:
- Secured debts. Any debt with collateral is considered secured. The most common secured debt is a mortgage, but car loans are also common
- General unsecured debts. This type of debt usually includes credit cards, personal loans, and medical debt. Any debt that is not backed by collateral is unsecured, unless it qualifies as priority.
- Priority debts. These are debts that the bankruptcy code considers more important than other debts, in particular, general unsecured debt.
The most common priority debts are family law obligations, such as child support or spousal support payments. Many of our clients are behind on these payments, so they have arrearages that must be paid back. Some clients are having their wages garnished as a result.
Certain taxes are also treated like priority debts, especially if they are recent. However, older income tax debts might be considered no different than general unsecured debt. You should meet with an attorney to review any back taxes.
Congress decided these debts should be priority because they benefit the public. Children who do not receive child support could end up on public assistance, which costs everyone money. Tax debt also goes to supporting the public, so it is deemed priority in most cases.
Why Priority Debt Matters
Priority debts get paid first in bankruptcy, ahead of other debts. This might not matter a lot to you, as the debtor, but it is a big deal for creditors. If a creditor has a secured debt, they can seize the collateral and should be somewhat protected. A priority creditor, however, leap frogs over a general unsecured creditor in line for payment.
Here’s how it can matter. If you filed Chapter 7, the trustee can take non-exempt assets, sell them, and then distribute the sales proceeds to your creditors. Your priority debts must be paid in full—100%–before any leftover proceeds can be distributed to other creditors.
Most of the priority debts our clients have are also non-dischargeable. This is certainly true of domestic relations orders, such as child support. So these debts remain after you complete your Chapter 7.
In a Chapter 13, you must pay off all your priority debts in a payment plan that lasts 3-5 years. If you don’t, you can’t get your case discharged. General unsecured creditors will receive something in a Chapter 13, though they rarely get 100%. You wipe out general unsecured debt at the end of your payment plan—but you can’t eliminate priority debts.
Speak with a South Florida Bankruptcy Attorney
Nowack & Olson PLLC has been helping indebted South Floridians for decades. Our Plantation bankruptcy lawyers can review your debts and determine which ones you can eliminate if you call to schedule a meeting at 888-813-4737.