What Are Priority Debts, and How Are They Addressed During Bankruptcy?

 Posted on July 25, 2022 in Bankruptcy

A person or family may accrue multiple types of debts. When debts become overwhelming, or when financial difficulties make it impossible to repay what is owed, bankruptcy may be the best option, since it will often allow for the elimination of certain debts. For those who are considering bankruptcy, it is important to understand how different debts will be handled, including those that are considered to be priority debts.

Priority Debts in Chapter 7 and Chapter 13 Bankruptcy

Bankruptcy allows some debts to be discharged, eliminating the debtor’s requirement to repay the amounts owed. Secured debts such as home mortgages or auto loans generally will not be discharged during bankruptcy, since this would lead the creditor to repossess the collateral used to secure the loan. However, unsecured debts can usually be discharged once the bankruptcy process is completed.

Certain types of unsecured debts are considered to be priority debts. These debts usually cannot be discharged, and any past-due amounts will be given top priority when payments are made to creditors during the bankruptcy process. Priority debts include:

• Domestic support obligations - Child support or spousal support (alimony) must continue to be paid according to orders put in place in family court. In addition to the requirement to make ongoing payments, any unpaid amounts will need to be repaid, along with any applicable interest.

• Taxes - Any income taxes that were due in the three years prior to filing for bankruptcy will need to be repaid. Certain other types of taxes that are owed may also be given priority.

• Personal injury or wrongful death claims - If a person injured or killed someone else while they were driving under the influence of alcohol, the requirement to pay damages may not be discharged through bankruptcy.

• Student loans - While federally-backed loans used to pay educational expenses are technically not considered priority debts, they usually cannot be discharged through bankruptcy, and any past-due amounts may need to be addressed during the bankruptcy process.

In a Chapter 7 bankruptcy, a debtor’s non-exempt property may be seized and liquidated, and the proceeds will be used to repay creditors. Priority debts will be repaid first, and other unsecured creditors will only receive payments after these debts have been fully repaid. If the liquidation of assets will not fully cover the past-due amounts on these debts, the debtor will still be required to repay these amounts after completing the bankruptcy process.

Priority debts are handled similarly in a Chapter 13 bankruptcy. In these types of bankruptcy cases, a repayment plan will be created, and the debtor will make monthly payments for a certain amount of time (usually five years). These payments will be applied to priority debts, and after the amounts owed on these debts have been repaid, other unsecured creditors will receive payments.

Contact Our San Antonio, TX Bankruptcy Lawyer

Determining how to address different debts during bankruptcy can be a complex process. At the Law Offices of Chance M. McGhee, we can advise you on whether the amounts you owe to different creditors are priority or non-priority debts, and we will advise you on the best options for receiving debt relief. Contact our Boerne bankruptcy attorney by calling 210-342-3400 and scheduling a complimentary consultation.

Sources:

https://www.law.cornell.edu/uscode/text/11/507

https://www.experian.com/blogs/ask-experian/understanding-priority-and-non-priority-debt-in-bankruptcy/