Priority DebtCredit Repair Definition
Certain types of unsecured debt given higher priority for repayment than general unsecured debts in bankruptcy.
Definition
Priority debt refers to specific categories of unsecured debt that, according to the U.S. Bankruptcy Code, must be paid in full before general unsecured creditors receive any distribution from the bankruptcy estate. These debts are given special priority status due to public policy considerations. Even though they are unsecured, they rank higher than other unsecured debts like credit cards or medical bills. Common examples of priority debts include certain tax obligations (like recent income taxes), domestic support obligations (child support and alimony), administrative expenses of the bankruptcy case (like trustee and attorney fees), and certain employee wage claims. Priority debts are generally non-dischargeable, meaning they must still be paid even after bankruptcy.
Frequently Asked Questions
What is the order of payment in bankruptcy?
Generally, the order is: (1) Secured creditors (paid from their collateral); (2) Priority unsecured creditors (paid in a specific order defined by the Bankruptcy Code); (3) General unsecured creditors (paid pro rata from any remaining funds); (4) Equity holders (shareholders, typically only in business bankruptcies if funds remain).
Are priority debts dischargeable in bankruptcy?
Most priority debts are also non-dischargeable. This means that even if there aren't enough assets in the bankruptcy estate to pay them in full, the debtor typically remains responsible for paying the remaining balance after the bankruptcy case is closed.
How are priority debts handled in Chapter 13 bankruptcy?
In a Chapter 13 repayment plan, the debtor must propose a plan that pays priority debts in full over the 3-to-5-year plan period, unless the creditor agrees to different treatment or the plan pays all disposable income.
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