What Is a Priority Debt?

If you file for bankruptcy, the different debts that you have are not all created equal in the eyes of the law. Some debts are considered to be priority debts that cannot be discharged through a bankruptcy filing. Let’s look at the details as they apply to the two most common types of bankruptcy that are filed by individuals.

Priority Debt and Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is called a liquidation bankruptcy. Property that you have that is not exempt would become part of your bankruptcy estate. This property would be sold by the trustee, and the proceeds would be used to pay back a portion of your debts. Priority debts would be the first debts that would be paid by the bankruptcy trustee. These would include recent unpaid income taxes, alimony, child support, compensation that you owe to employees, and a handful of other less common types of debt.

Priority debts such as these will never be discharged, even after the bankruptcy is finalized. As a result, the creditors can continue to seek payment if they were not paid in full by the bankruptcy trustee after the liquidation. Plus, property that you acquire after the bankruptcy will not be part of the bankruptcy estate. As a result, priority debt creditors could seek to attach your wages going forward.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is a reorganization rather than a liquidation. You present a reorganization repayment plan to the bankruptcy court, and you are given three or five years to complete the plan. Under this type of bankruptcy, you don’t necessarily lose any of your property, and you may not have to pay all your creditors in full. In fact, you may not have to pay some unsecured debts at all.

The priority debts in Chapter 13 are identical to the priority debts that we described above in the Chapter 7 section. These debts must be paid in full over the term of your reorganization plan. Though it is not technically a priority debt, secured claims, like mortgage arrearage that is folded into the repayment plan, must be paid in full as well.

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