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Bankruptcy: Priority vs. Non-Priority Debts

Are you considering filing Chapter 7or Chapter 13 bankruptcy? If so, you will be interested in learning about secured debts, unsecured debts, and which of those debts are classified as “priority debts” and “non-priority debts.” Why does this matter to you? Because, how a debt is classified will directly impact the outcome of the claim and the outcome of your bankruptcy case. Read on as we explain in further detail.

In bankruptcy, debts are put into two categories: secured debts and unsecured debts. What’s the difference between the two? Secured debts are backed by collateral, while unsecured debts are not. Examples of secured debts are a mortgage and an auto loan. If a debtor defaults on either debt, they can be taken away.

Unsecured debts are NOT backed by collateral. Examples of unsecured debts include credit card debt, personal loans, medical debt, utility bills, cellphone bills, and so on. When you file for bankruptcy, unsecured debts are divided one more time into priority debts and non-priority debts.

What is a Priority Debt?

Under the Bankruptcy Code, unsecured priority debts are as they sound, they are a priority over all other debts. Such debts are usually owed to a government, or they should be paid because it’s a matter of good public policy. Priority debts include but are not limited to:

  • Child support;
  • Spousal support;
  • Recent taxes;
  • Court-ordered fines;
  • Victim restitution (criminal cases);
  • Criminal fines & penalties; and
  • Money a debtor owes for causing a DUI accident resulting in bodily injuries or death.

A debtor cannot discharge a priority debt in bankruptcy. In a chapter 7 bankruptcy case if there is money available, payments will go to these priority debts first before paying off any other debt obligation. In a Chapter 13 case, priority debts are paid in full throughout your repayment plan. So, if you receive a bankruptcy discharge, you will still be on the hook for any leftover priority debts that were not paid in full for any reason.

Some examples of non-priority debts in bankruptcy:

If you have priority debts and you file bankruptcy, your priority debts must be paid before any other debts. In Chapter 13, priority debts must be paid in full and sometimes they include interest. In Chapter 7, if the trustee has not recovered money (through liquidating non-exempt assets) to pay off priority debts, they will not be paid and the debtor will still be liable for them after the discharge.

Have questions about priority debts and which bankruptcy is right for you? Contact Nguyen Law Group to meet with a bankruptcy attorney in our office in Rancho Cucamonga, Mission Viejo, and Santa Ana!