Can Bankruptcy Petitioners Choose Which Debts are Paid Off First?

  1. Personal Bankruptcy
  2. Can Bankruptcy Petitioners Choose Which Debts are Paid Off First?
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When you are considering filing bankruptcy, you have a lot on your mind. You need to think about your specific financial situation and the eligibility requirements for Chapter 7 bankruptcy. You need to consider whether your situation is best suited to Chapter 7 bankruptcy or Chapter 13 bankruptcy. If you own property, you need to consider how the different types of bankruptcy would treat your property. If you are a business owner, you need to determine whether or not your business will be adversely affected by the filing. You’ll need to gather documents and tax returns, organize it all, make decisions, and schedule consultations to make sure your bankruptcy attorney has all your information. It’s a lot to think about, but there are some things the petitioner doesn’t have to think about – like which creditors get paid first.

Who Decides Which Creditors Get Paid First?

Creditors are supposed to be paid fairly in bankruptcy. The bankruptcy court and the bankruptcy trustee oversee the process. The automatic stay halts all collection activity, but creditors give proofs of their claim to basically “line up” to be paid through your bankruptcy estate.

How Does the Court Decide How Much to Pay Creditors in Chapter 7 Bankruptcy?

In Chapter 7 bankruptcy, if there are not enough funds in your bankruptcy estate to pay all your creditors in full, payments are issued by percentages to each of them. In a Chapter 7 bankruptcy case, some secured creditors will receive the property back (like a vehicle or a piece of real estate). Although petitioners who wish to keep their property associated with secured loans may do so by signing a reaffirmation agreement that says they are still obligated to make payments on the property. Non-exempt property is sold in Chapter 7 bankruptcy, and the proceeds from the sale are used to pay creditors according to a standard priority order with non-secured creditors at the bottom of the list.

How Does the Court Decide How Much to Pay Creditors in Chapter 13 Bankruptcy?

Similar to Chapter 7 bankruptcy, the Chapter 13 bankruptcy process provides payment to secured creditors before any payment to non-secured creditors. Other debts that are given priority include child support, spousal support, tax debt, etc. Unsecured debts receive whatever disposable income remains after the “priority” debts are paid. The remaining disposable income is divided amongst the unsecured creditors. Some debts, like student loans, are typically excluded from the process as they are generally not eligible for discharge in a Chapter 7 bankruptcy and are still in place after a Chapter 13 bankruptcy.

If you are worried about which of your debts will be paid during bankruptcy, we can help. Most bankruptcy offices in the Chattanooga area don’t have a single Consumer Bankruptcy Specialist on staff. Our office is the only one in the Chattanooga area with two. Please get in touch. You are in good hands with Kenneth C. Rannick P.C.

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