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Friday, September 20, 2019

An Overview of Priority Debts in Bankruptcy

When filing for bankruptcy, debt will be grouped into two primary categories: secured and unsecured. Secured debt is asset-backed debt in which the lender has a property interest, such as a  car loan or a mortgage. If you take out a $100,000 mortgage to acquire a home, and the mortgage is secured by the property you’re acquiring, then the bank has a “property interest” in the home for the value of the outstanding loan. Similarly, an auto lender will retain a property interest in the vehicle for the outstanding value of the loan.

Comparatively, unsecured debts are not asset-backed. These are loans where the only recourse the lender has is to attempt to get you to pay – they cannot repossess your property as you have not pledged it as collateral. A common example of unsecured debt is a credit card. The bank lends you credit without any guarantee beyond your word that you’ll pay it back.

When filing for bankruptcy, secured debts are paid first based on the assets that they are secured by. Unsecured debts are satisfied second. However, unsecured debts are further divided into two categories for order of payment: priority and nonpriority. Priority debts are debts that are specifically identified in the Bankruptcy Code to be paid before other unsecured debts. Additionally, priority debts are not dischargeable in bankruptcy. This means that filing for bankruptcy will not eliminate your priority debt obligations.  Comparatively, non-priority unsecured debts are all other debts such as credit card debt, medical debt, and personal loans.

Priority debts are explicitly defined by the Bankruptcy Code meaning that unless the unsecured debt is expressly identified as being a priority debt, it is an unsecured non-priority debt and generally dischargeable in bankruptcy. Common priority debts include:

  • Legal fees and other costs associated with the bankruptcy;
  • Child support;
  • Spousal support (alimony);
  • Money owed to the government such as income tax or overpaid benefits;
  • Money owed for causing the death or personal injury of another person as a result of drug or alcohol consumption; and,
  • Criminal fines and fees.

To help provide some context to priority debts and bankruptcy, consider a Chapter 7 bankruptcy where assets are liquidated to pay outstanding debts. After the secured creditors are paid, the debtor has $30,000 remaining. The debtor still owes $45,000 in unpaid child support and $20,000 in credit card debt. The trustee will first deduct the costs of the bankruptcy from the remaining $30,000 – let’s say $2,000 in this example. Now, the trustee will pay off the unsecured debts with the unpaid child support first. The remaining $28,000 will go to the unpaid child support reducing it to $17,000. Because there is no money left to pay remaining debts, the credit card debt will go unpaid and be discharged because it’s unsecured non-priority debt. However, the remaining $17,000 of child support will not be discharged and will continue to be owed following the bankruptcy due to its priority debt status.

Understanding the intricacies of asset and debt classification is essential when filing for bankruptcy.


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Serving Southeastern Wisconsin, with offices in Milwaukee and West Bend, Affliated Attorneys, LLC represent clients throughout Milwaukee County, Washington County, Waukesha County, Dodge County, Ozaukee County, Racine County, Sheboygan County, Jefferson County, Fond du Lac County and Walworth County.



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