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How priority and non-priority debts are treated in bankruptcy?

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By: Renee Brown
on 17th Oct,2016

You can continue reading to acquire more information on priority debts and non priority debts in bankruptcy.
How priority and non-priority debts treated in bankruptcy?

Debt is taking a serious shape in the global economy, so start paying off the owed amount immediately if you're burdened with debt. In case you're financially strapped, then bankruptcy is considered as one of the effective debt reduction strategies that may help you give a fresh start. When you file bankruptcy, some of the debts are marked as priority. Most of the people may not have a clue about priority obligation and how the priority obligations are treated in bankruptcy. You can continue reading to acquire more information on priority debts and non-priority debts in bankruptcy.

What is the implication of priority debt in bankruptcy?

Priority debt is a term that you can be familiar with when you file bankruptcy. You can discharge most of your unsecured debts in bankruptcy. Some of the debts are given priority status and these debts may not be discharged in bankruptcy. Therefore, the priority debts are considered to be some of the important debts that need to be paid off in the bankruptcy process with the help of a proficient lawyer.

Are you aware of the difference between priority and & non-priority debt?

In the bankruptcy process, the unsecured debts are segregated into two categories that are priority debts and non-priority debts. As a matter of fact, Congress stresses on paying priority debts than non-priority debts. So, the priority debts need to be paid first before the non-priority unsecured debts in Chapter 7. But in chapter 13 bankruptcy, priority debts must be paid in full through your payment plan.

What are the debts conferred with the priority and non-priority status?

Section 507 of the Bankruptcy Code has clearly stated the conditions under which a debt is marked as priority. In reality, all the debts can't be treated as a priority, and the priority debts may vary from person to person. The list given below can help you know the type of debts that are considered as priority debts and non-priority debts.

Types of Priority debts:

  • Domestic Support Obligation- Alimony and child support
  • Administrative Expenses - Trustee, commissions for Chapter 7 Bankruptcy and lawyer’s fee for Chapter 13
  • Employee Benefit Contribution Claim
  • Post-petition claims that could be determined during filing bankruptcy
  • Federal Taxes
  • Claims for personal injury or death due to DUI charges
  • Claims for recent wages

Types of Non-priority Debts:

  • credit card debt
  • medical debt
  • utility bills
  • older tax debt
  • student loans (these are usually not dischargeable, however)
  • personal loans
  • union dues

The priority debts may vary from one person to another as some of the debts mentioned above may not be relevant to most of the individuals. But the common priority claims are federal taxes, administrative expenses, child support, alimony and DUI injury compensation.

Do you have knowledge on Asset Distribution and discharge ability?

  • 1 Asset Distribution: If the assets and properties you own are exempted, then the court-appointed trustee may not be able to take your assets from you. In Chapter 7 bankruptcy, if there are no assets to pay creditors, the designation as a priority debt is of no consequence. This case is considered as no asset case, and it means that the person filing bankruptcy gets to keep everything he owns. However, in asset case, the trustee takes possession of any asset for liquidation and distribution to the creditors. But it may not mean that the general unsecured creditors may receive the money. The trustee is required to pay off all the priority debts along with trustee's own fees and the remaining fund gets distributed among the unsecured creditors.
  • 2 Dischargeability: The term defines whether or not the creditors can dispute your ability to get a discharge. In most of the cases, general unsecured debts” are not challenged and they're discharged. If the discharge of debts is challenged, then you've to pay some or all of that particular debt. However, this is only possible if the creditors can show that you fit within the criteria of non-discharge ability.

How are dischargeable debts treated in bankruptcy?

The dischargeable debts are completely eliminated in Bankruptcy without any repayment. The treatment of dischargeable debts in bankruptcy depends on whether you're filing under Chapter 13 Bankruptcy.

  • 1 Dischargeable debts in Chapter 7: Chapter 7 Bankruptcy is considered to be no asset cases, as the trustee has nothing to sell to pay creditors with. So, debts are discharged and creditors fail to retrieve the owed amount in Chapter 7 Bankruptcy. In this case, the unsecured debts are paid at last after paying off the priority debt in case of asset cases.
  • 2 Dischargeable debts in Chapter 13: In Chapter 13 Bankruptcy, most of the dischargeable debts are treated as non-priority and they're an unsecured claim. In case, a discharged debt is a secured one, then you can either continue making the payment on it during Chapter 13 or surrender the car along with your personal liability to discharge your car loan after the completion of the bankruptcy process.

How are non-dischargeable debts treated in bankruptcy?

The Congress has decided that some of the debts are extremely important to be discharged in bankruptcy. These debts survive in bankruptcy and they're not wiped out in bankruptcy discharge, so you're required to pay them back. As a matter of fact, how the nondischargeable debts are treated depend on whether you're filing under Chapter 7 or Chapter 13 Bankruptcy.

Non-dischargeable debts in Chapter 7 bankruptcy:

Non-dischargeable debts will survive bankruptcy discharge and it may receive priority treatment in Chapter 7 Bankruptcy. So, you're obligated to pay off the debts even after filing bankruptcy.

Non-dischargeable debts in Chapter 13 bankruptcy:

In Chapter 13 Bankruptcy, the non-dischargeable priority debts needs to be paid in full through a repayment plan. In case you've priority debts, make sure they're paid before receiving a discharge.

Are you aware of unsecured, non-priority debts that can never be discharged?

Here are some of the debts that have non-priority status but can never be discharged for instance:

  • student loans
  • fines, penalties, or restitution imposed by a government as punishment
  • court fees
  • intoxicated driving debts
  • homeowner's association fees assessed after you file for bankruptcy.

Therefore, you need to consult a deft attorney to acquire more information on priority and non-priority debts in bankruptcy. A better understanding of the bankruptcy process can help you make decisions.

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