What is Priority Debt in Bankruptcy, and Why Does it Matter?

If you are thinking about filing for Chapter 7 bankruptcy, you might have heard the term “priority debt.” While the term might sound like it is referring to debts that are the priority of the consumer who is seeking bankruptcy protection, in fact, the opposite is true. When a consumer in Oak Park files for personal bankruptcy, some debts are considered priority debts under the U.S. Bankruptcy Code. In other words, federal law says that some debts need to be prioritized over others when creditors are being compensated from the bankruptcy estate. How will your bankruptcy case be affected by priority debt?
Understanding How Priority Debts are Related to Secured and Unsecured Debt
When an individual thinks about filing for bankruptcy, she or he likely has two different types of debt - secured debt and unsecured debt. Secured debt is the type of debt with collateral. In other words, the creditor has an interest in the property you have and can repossess that property if you fail to make payments. One of the most common types of secured debt is an automobile for which you still have a car loan and make payments. Secured debt is not the area in which the question of priority debt arises. Instead, priority debt concerns unsecured debt.
Unsecured debt refers to any debt you have that does not have property that serves as collateral. If you fail to make payments on unsecured debt, the creditor cannot come and repossess the property, for instance, that has been serving as collateral. The creditor can, however, file a claim against you and take you to court in most situations.

What is the relationship between unsecured debt and priority debt? In general, unsecured debt will either be classified as priority debt or nonpriority debt. What leads a particular type of debt to be classified as a priority debt?
Priority Debts in Your Chapter 7 Bankruptcy Case
Which debts are classified as priority debts? Simply put, priority debts are those that are classified as such by the U.S. Bankruptcy Code. The Bankruptcy Code gives priority to certain debts that the debtor owes to the government, or for which it is in the interest of the public good to ensure that the debt gets repaid. In most cases, these are debts that would not be dischargeable in a bankruptcy case (or could be difficult to discharge), including but not limited to the following:
  • Recent income tax debt;
  • Child support;
  • Spousal maintenance or alimony; and
  • Money you owe as a result of a personal injury claim involving impaired driving.
Priority debts, according to the U.S. Bankruptcy code, get paid first. As such, when your property is liquidated (aside from property that is exempt), the proceeds will be used to pay your priority debts before paying any other nonpriority debts such as credit card debt or medical debt. For many debtors who have priority debts, the fact that priority debts get paid first actually benefits them. If there is enough money to pay off the priority debts, then the nonpriority debts are eligible for discharge.
Learn More from an Oak Park Bankruptcy Lawyer
If you have questions about priority debt, an Oak Park bankruptcy attorney can help. Contact the Emerson Law Firm for more information.
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