The Bankruptcy Code separates debts into three general classes: (1) secured debts, like a house or car loan; (2) unsecured debts, like medical bills or credit cards; and (3) priority debts. Priority debts are those obligations that Congress has identified as important enough to have a special repayment status if money is distributed to creditors. The Bankruptcy Code establishes the order that unsecured claims are paid, with priority debts paid first.
Priority debts are listed on Schedule E of your bankruptcy paperwork. The Bankruptcy Code lists nine different types of priority debts that are paid before other unsecured debts. Priority debts are not relevant in most consumer Chapter 7 cases because no money is available for creditors.
The most common types of priority debts, and their rank, are as follows:
- Administrative Expenses. Expenses incurred by the trustee or debtor in preserving estate property, including wages, salaries or commissions for services rendered after the case has been filed. This category includes attorney’s fees incurred by the trustee or debtor in preserving estate property, or bringing property into the estate.
- Child Support, Alimony and Domestic Support Obligations. Debts owed for accrued but unpaid support or alimony payments owed to a spouse, former spouse or child.
- Taxes. Certain unpaid taxes are priority debts, including income taxes that are less than three years old; employment taxes owed by employers; and sales tax owed to a governmental entity.
Priority claims must be paid in full during a Chapter 13 repayment plan (which cannot be longer than five years). Consequently, the monthly repayment amount must be large enough to pay your priority debts within five years. All other non-priority unsecured debts are paid with any funds that remain after the priority claims are paid.
Bankruptcy can help you repay your priority debts over three to five years. During the repayment period the debtor is under the protection of the bankruptcy court and creditors are not allowed to contact, harass, sue, or otherwise collect from the debtor (and usually any co-debtor). If you need to restructure your finances and pay priority debts, contact an experienced bankruptcy attorney and learn how the federal law can help you.