If you are filing bankruptcy or considering filing in the future, it’s important to understand the difference between priority and non-priority unsecured debts.
Priority and Non-Priority Debts: What’s the Difference?
During a bankruptcy proceeding, the judge (with the help of the bankruptcy trustee) considers the filer’s outstanding debts and puts them in priority order. Outstanding debts refers to any claims by creditors (companies or individuals) the filer owes money. Each of the debts or “claims” is reviewed by the bankruptcy court and ranked according to their priority or significance. Debts determined as priority debts are considered more important according to federal bankruptcy law, and are addressed first before other competing claims are considered.
What Sort of Unsecured Debts are Considered Priority Debts?
- Child support
- Criminal fines or court ordered fees
- Unpaid federal income tax obligations (usually only those less than three years old)
- Federal student loans (cannot be discharged automatically through bankruptcy like non-priority debts, but in rare cases, may be discharged by pursuing a separate procedure called an “adversary proceeding” in conjunction with a bankruptcy filing).
What Sort of Unsecured Debts are Considered Non-Priority Debts?
- Credit card or revolving credit accounts
- Personal loans
- Private debts (to friends or family, etc.)
- Past due bills (rent, utilities, phone, etc.)
How Are Priority Debts Treated Differently During Bankruptcy?
During Chapter 7 bankruptcy, if there are sufficient funds to cover payment of any of the filer’s debts, the creditors holding priority claims are paid first. During Chapter 13 bankruptcy, creditors holding priority claims are typically paid in full while nonpriority debts are usually provided a partial payment in accordance with the Chapter 13 payment plan. When assets are sold (during Chapter 7 bankruptcy), the proceeds are required to first cover priority debts.
If you need are filing bankruptcy and have questions about priority and non-priority debts, call Kenneth C. Rannick P.C., Tennessee, and Georgia bankruptcy attorney. We help good people through bad times.