If you’re filing for bankruptcy, then chances are you’d want to find out exactly how to properly distribute your limited funds to pay off the debts. Fortunately, the law provides for this dilemma by establishing a hierarchy of debt payment starting with Priority Debts. In this article, you’ll find out exactly what Priority Debts entail.
When it comes to paying off bankruptcy debts, an order of “priority” is often established by the trustee. This is because the very nature of bankruptcy means that:
- the liabilities of the individual far outweigh the assets;
- the person is no longer capable of making payments.
With the assets markedly insufficient to pay off all the bills, some creditors will not be paid in full. The “priority” ones will be paid first before those that are of less importance are paid last.
Priority in Chapter 7
Priority debts considered under Chapter 7 are as follows:
- Any wages or commissions owed by the employer amounting up to $12,475 per person. This must be earned within 180 before the bankruptcy petition;
- Any debts owed to farmers and fishermen amounting up to $6,150 each;
- Employee benefit plan contributions within 180 days prior to bankruptcy filing;
- Alimony, support, or maintenance;
- Any income taxes that came due within the last 3 years before filing for bankruptcy;
- Any customs, penalties, and duties to be paid to the federal state or any government unit;
- Claims for death or personal injury due to reckless driving;
- Amounting up to $2775 for the purchase, rental, or lease of property services for personal use that were not provided.
Priority in Chapter 13
In Chapter 13, the Priority payments include the following:
- Specific taxes;
- Any salaries wages, or commissions owe to employees;
- Domestic support like child support and alimony;
- Custom duties and penalties to be paid to government units;
- Employee benefit plan contributions;
- Injuries caused by drunk driving.
Reasoning Behind Priority Claims
If you’ll notice, the Priority Claims noted under Chapter 7 Bankruptcy and Chapter 13 Bankruptcy is practically the same. This is because the rationale behind both is not different from each other. The law considers that to protect public policy, it is important that the said debts are paid in FULL, allowing them to be the first in line.
After Priority Claims have been paid, the trustee will move on to other types of debts such as the secured ones and the unsecured. Of the two, secured debts usually have a better standing since essentially, there’s an asset tied to the payment of the debt.
Unsecured claims are those with no collateral to back them up. Under Unsecured claims are two types: priority and non-priority. Priority claims were discussed above and as opposed to them are non-priority types which include credit card debts and medical bills.
How Priority Claims are Paid
Understand that all repayment plans must provide for the FULL payment of priority claims. If the priority claims aren’t properly provided for, they will be returned for further deliberation which can lengthen the bankruptcy petition.
As for payment, it is preferred that they be paid during the term of the bankruptcy. There are however, exceptions to this rule categorized in the Priority Claims of Chapter 11 Bankruptcy.
Understand that some debts fall under different categories and will be decided on by the trustee. Make sure to check with your trustee regarding the debts in order to properly categorize the claims according to their order of importance.