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Recent Blog Posts
The Debtor, Creditor, Lawyers, Bankruptcy Clerk, Trustee, and Judge
Bankruptcy is a lot easier to understand and much more comfortable to go through when you know who’s who.
We start a series today about the terms used in bankruptcy cases. Bankruptcy laws and procedures can definitely be confusing. It helps a lot to be able to understand the language used by the people involved.
The People Involved
An appropriate place to start is with the different roles of the people involved. Knowing what each person does and how they fit into the big picture gives you a good start at getting a hang of that big picture.
The Debtor
This is what the U.S. Bankruptcy Code calls the person filing bankruptcy. See Section 101(13) of the Bankruptcy Code. It’s more neutral and less judgmental in tone than the term used decades ago, “bankrupt.”
A Scenario about Debts from a Vehicle Accident
One example how debts from a vehicle accident, involving possible drunk driving, are handled in bankruptcy.
Our last blog post made the point that if someone injures another person by driving while legally intoxicated, bankruptcy can’t write off the financial obligations for the injuries. Sounds pretty straightforward.
But let’s give you a scenario that shows how this works, and may not be quite that straightforward.
The Scenario
Two years ago you were in a vehicle accident, involving one other driver and her vehicle, no passengers. You drove fast through a stop sign without stopping, broadsiding the other vehicle on the driver’s side. Fortunately the point of impact was behind the driver, so she was significantly injured but not nearly as bad as she could have been. Even more fortunately there were no passengers in the back seats.
"Priority" Debts for Injuries from Driving while Intoxicated
If you injured someone by unlawfully driving while intoxicated, the resulting obligation can’t be discharged in bankruptcy.
Our last 5 blog posts have been about how bankruptcy deals with “priority” debts. The specific types of priority debts we’ve focused on so far are child/spousal support, wages owed employees, and income taxes. See Sections 507(a)(1),(4), and (8) of the U.S. Bankruptcy Code.
Today we look at another type of priority debt, one that many people don’t realize is a priority one. It is the newest priority debt, described as such by Congress in the last major overhaul of the Bankruptcy Code in 2005.
Unlawful Operation of a Vehicle while Intoxicated
The Code’s definition for this type of debt is a claim “for death or personal injury resulting from the operation of a motor vehicle or vessel if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.”
"Priority" Wages and Benefits Owed to Employees
If you owe an employee wages or benefits, it’s likely a priority debt. Same if you are owed wages or benefits. More likely to be paid.
We’ve been writing in recent blog posts about “priority” debts, such as child/spousal support and income taxes.
In a Chapter 7 case the bankruptcy trustee pays these in full ahead of paying anything whatsoever on other debts. See Section 726(a)(1) of the U.S. Bankruptcy Code. (That’s only if the trustee has any of your assets to liquidate, which is usually not the case.)
In a Chapter 13 case you have to pay priority debts in full during the life of the case. See Section 1322(a)(2).
Employee Wages and Benefits
There’s a type of priority debt that doesn’t come up nearly as often as child/spousal support or income taxes. But when it does it could be very important.
Are "Priority Income Tax Debts Discharged in Chapter 7 Bankruptcy?
Income tax debt may be discharged—legally written off—in a Chapter 7 case. It just needs to meet some conditions.
Our last blog posts have been about “priority” debts, such as child/spousal support and income taxes. A key point has been that your Chapter 7 trustee pays priority debts ahead of your other debts. But that’s irrelevant if the trustee doesn’t have any money to pay ANY of your debts. And that’s what happens in most Chapter 7 cases. That’s because in most cases everything the debtor owns is protected through property exemptions.
But some of the priority debts are also “nondischargeable”—they cannot be written off in bankruptcy. That’s always relevant—you definitely want to know whether a debt will be discharged or instead you will still need to pay it.
Priority vs. Dischargeable Debts
Can "Priority" Debts Be Discharged in Chapter 7 Bankruptcy?
A bankruptcy trustee would pay your “priority” debts ahead of other debts in an “asset case.” But what happens in a “no asset case”?
Our last blog post showed how a Chapter 7 trustee favors “priority” debts when paying any of your debts. The trustee pays priority debts in full before paying anything to your other debts. It gets the money to pay any of your debts by liquidating assets that you might own which are not protected, or “exempt.”
But the reality is that most of the time the trustee doesn’t pay ANY of your debts. That’s because most Chapter 7 cases are “no asset cases.” This means that the trustee has no assets to distribute to your creditors, since everything you own is protected from them.
So what happens to your priority debts then?
Priority Debts and Debts that Can’t Be Discharged
"Priority" Debts in Chapter 7 Bankruptcy
Here’s what happens to “priority” debts in an “asset case.”
Our last blog post introduced “priority” debts. They are debts that are favored in bankruptcy because Congress has decided they are of a type that should be favored. Today we focus on how they’re favored in Chapter 7 “straight bankruptcy.”
Chapter 7 Trustee Usually Doesn’t Pay Any Debts, Including Priority Ones
Last time we said:
In most Chapter 7 cases the bankruptcy trustee does not take possession of any of your assets to distribute to your creditors. Because there are no funds for the trustee to pay any debts, priority debts do not come into play. But there are (relatively few) cases where there are unprotected assets for the trustee to liquidate. In those cases the trustee must pay the priority debts in full before paying the general unsecured ones anything.
"Priority" Debts in Bankruptcy
What makes “priority” debts so special?
Your debts fall into three categories:
- Secured
- General unsecured
- Priority
We’ve spent many blog posts covering secured and general unsecured debts. Today it’s time for priority debts.
Priority Debts
Just like it sounds, priority debts are treated in bankruptcy law as more important than other debts. They’re more important, essentially, than “general unsecured” debts.
Debts that are not secured by liens on anything you own are all unsecured debts. Just about all unsecured debts are “general unsecured” ones.
Priority unsecured debts are simply certain kinds that the law has selected to be treated with higher priority than other debts.
Why Are They Treated with Higher Priority?
For each type of priority debt there are reasons why it is treated special.
Example of How Chapter 13 Handles a Creditor with a Disputed Lien
Here’s a scenario showing how Chapter 13 solves problems that Chapter 7 doesn’t solve in dealing with a creditor’s disputed lien.
Our last blog post got into what happens when you don’t think a creditor has a legally enforceable lien in something you own. We explored some practical problems if you addressed this situation in a Chapter 7 case. Essentially, the creditor has a lot of leverage to make you pay the debt, even with a questionable lien. We showed how Chapter 13 elegantly takes that leverage away, minimizing what you pay on that debt.
That last blog post begged for an example how this all works. We’re giving you that here today.
Our Example
Imagine that a year ago you bought one of those laptop computers that fold into a tablet for $500. You got it an electronics store where you had an account, and put the whole purchase price on that account. The previous balance had been $750 from the purchase of a variety of items over the previous couple years. Then during the 6 months after buying the computer you bought other minor items totaling $250. After making minimum monthly payments for most of the last year you now owe $1,300 on the account.
When a Creditor Has a Disputed Lien in Chapter 13
When a creditor may not have a valid lien, Chapter 13 gives you a good way to defeat that disputed lien and the claim against your property.
Our last blog post dug into what happens when a creditor does not assert its rights in the lien it has against your property. Or it does so only after your Chapter 7 case is completed. We showed the advantages of dealing with this situation under Chapter 13.
But what if there’s a dispute about whether there is a valid lien? Today we’ll show how, again, Chapter 7 leaves you with some practical problems, while Chapter 13 provides a good solution.
The Creation of Liens on Your Property
There’s a big difference between a debt in which the creditor has a lien on your property and one in which it doesn’t. It’s the difference between the creditor having rights against that property and having none. It’s usually the difference between the creditor being able to take or repossess your property or not. In a Chapter 7 “straight bankruptcy” it’s the difference between having to pay part or all of the debt to keep your property vs. paying nothing.
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