The goal of bankruptcy is to deal with debt. Whether that is done by liquidating non-exempt assets and discharging debt (as in Chapter 7 bankruptcy) or by creating a payment plan to pay back all or most of your debts (as in Chapter 11 and Chapter 13 bankruptcy), the goal remains the same.
However, not all debts are created equal in bankruptcy. There are several types of debt that are differentiated at the beginning of a bankruptcy, and treated differently during the course of the bankruptcy.
For instance, every type of debt is either secured debt or unsecured debt. Secured debt is debt that is backed up by collateral, like a home mortgage or a car loan. Unsecured debt is any debt that is not backed up by collateral. This category includes many types of debt, including most credit card debt, medical debt, bills for rent, utilities, and cell phones, gym membership bills, loans from friends and family, and payday/personal loan debt
Unsecured debt is further sub-divided into two categories: priority debts and non-priority debts. As the name implies, priority debt takes precedence over non-priority debt when it comes to payment. Usually, priority debts have to be paid before non-priority debts can be paid. Claims by non-priority creditors (people or business entities to which the debtor owes money) are only addressed and paid if there is money left over after the priority creditors are paid in full.
What makes a debt a priority debt?
According to the Bankruptcy Code, there are several things that can classify a debt as a priority debt. The main two qualifiers of priority debt are:
- Any debt owed to the government.
- Any debt that is owed “in the interest of the overall public good.”
Some types of debt that are almost always considered priority debt include:
- Child support payments or arrears
- Spousal support payments or arrears.
- Criminal fines and Court-ordered fees
- Damages owed due to a personal injury/negligent homicide settlement or Judgement, specifically in cases when the injury/death was a result of the debtor’s intoxication.
- Payroll tax debt
- Sales tax debt
- Certain types of federal income tax debt less than three years old (and sometimes, federal income tax debt that is older than that)
- Debt from overpayment or fraudulent payment of certain types of government benefits (though some can be discharged)
- Federally backed student loans (though in some relatively rare cases—specifically, cases in which you can prove that you made good faith efforts to pay the loan and that you and/or your dependents will suffer hardship if you are compelled to repay the loan—these loans can be discharged through a separate but joint procedure called an adversary proceeding).
How are priority debts handled in a bankruptcy case?
As mentioned above, priority debts take precedence over all other debts. They must be paid in full by the bankruptcy Trustee before any other debts can be paid.
The only debts a bankruptcy Trustee can pay before priority debts are administrative claims. This can include the Trustee’s own fees, any attorney fees, and all costs associated with administering the bankruptcy.
In addition, most priority debts are not dischargeable. This means that, like secured debts, they aren’t wiped out by a bankruptcy. You will still be responsible for paying either the balance (after a Chapter 7 bankruptcy) or the entire amount owed (in the course of a Chapter 13 bankruptcy repayment plan).
Are you or a loved one considering filing for bankruptcy in Birmingham, Alabama? Birmingham bankruptcy attorney John Clark is ready to help. Call (205) 506-3354 for a free consultation on your case today.