Bankruptcy is a legal process designed to provide individuals and businesses with a fresh start on their finances by eliminating or restructuring their debts. However, not all debts are treated equally in bankruptcy proceedings. Certain debts are prioritized over others, determining the order in which creditors are repaid.
In this blog post, we'll explore which debts are prioritized during bankruptcy and how this can impact those who seek debt relief.
First Priority: Secured Debts
Secured debts are obligations that are backed by collateral, such as a house or car. In bankruptcy, secured creditors have priority over all unsecured creditors because they have a legal right to repossess or foreclose on the collateral if the debtor fails to make payments.
Consequently, the courts typically favor priority treatment for secured creditors, ensuring that they receive payment or have their collateral returned.
Second Priority: Certain Unsecured Debts
Priority unsecured debts are specific types of debt not secured by collateral but receive priority treatment when secured debts are satisfied or irrelevant to a case.
Priority unsecured debts can include the following:
- Domestic support obligations: This includes child support and alimony payments owed to a former spouse or dependent child. Priority is given to ensuring that these obligations are met to support the well-being of dependents.
- Certain tax debts: Priority may be given to certain tax debts, such as recent income tax liabilities or unpaid payroll taxes owed to the government. However, not all tax debts are considered priority, and the specific treatment of tax liabilities in bankruptcy can vary depending on the circumstances.
- Wages owed to employees: Unpaid wages, salaries, commissions, and benefits owed to employees are considered priority debts in bankruptcy. This ensures that employees receive compensation for their work before other creditors are paid.
- Certain administrative expenses: Bankruptcy proceedings may incur administrative expenses, such as court fees, trustee fees, and professional fees for bankruptcy attorneys or accountants. These expenses are typically given priority status to ensure that the bankruptcy process can proceed smoothly.
These debts are considered more important than other unsecured debts and must be paid in full or in part before other debts are addressed.
Third Priority: General Unsecured Debts
General unsecured debts are obligations that are not backed by collateral and are not considered priority debts. Examples of general unsecured debts include credit card debt, medical bills, personal loans, and utility bills. General unsecured creditors are typically last in line to receive repayment.
Debt Prioritization in Chapter 7 vs. Chapter 13 Bankruptcy
The way debts are prioritized in bankruptcy doesn’t differ much between Chapter 7 and Chapter 13 bankruptcy. That said, it’s important to have a grasp on how debt prioritization functions in either case.
In Chapter 7, non-exempt assets are liquidated by the bankruptcy trustee. This creates a pool of cash from which creditors are repaid. The order in which creditors are repaid follows according to the hierarchy described above.
In Chapter 13, a repayment plan is established for a period of three to five years. During this time, the bankruptcy filer makes regular payments. Again, these assets are redistributed among creditors according to the hierarchy above.
Do You Need Help Navigating Bankruptcy?
When it comes to bankruptcy, there can be a lot of overwhelming information to take in. If you’re struggling with debt, it’s hard enough to make sense of your situation, let alone the legal process that can help you out of it. That’s why you should seek help from an experienced bankruptcy lawyer.
Nguyen Law Group can provide the legal guidance you need to achieve debt relief. We’ll walk you through the bankruptcy process step by step, ensuring that you understand your rights and options along the way. With our help, you can worry a lot less about finding a brighter future.
Contact us today to request a consultation with our bankruptcy lawyer.
