When funds are available to pay off debts in bankruptcy, the bankruptcy trustee—the person tasked with overseeing the case—must disperse the money in a systematic way so that creditors receive payment in the order outlined in bankruptcy law. To start the process, a creditor must file a “claim” for payment using a proof of claim form. The creditor will describe the debt and attach documentation that proves that it’s owed. After the deadline to submit claims passes, the trustee will review them and make any needed objections before dispersing funds.
All claims are not treated the same, however. The trustee will pay some before others, depending on whether the claim is a secured claim, a priority unsecured claim, or a nonpriority unsecured claim, and the highest-ranking claims get paid first. (You can learn more by reading Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.)
Under the law, the payment of priority unsecured claims, such as child and spousal support arrearages and unpaid taxes, is more important than that of nonpriority unsecured claims. As a result, nonpriority unsecured claims fall last on the payment list, receiving payment only if money remains after the trustee fully pays all of the priority claims. (For more information about priority debt, see What Is a Priority Claim in Bankruptcy?)
So what is a nonpriority unsecured claim? Here are a few examples:
Most of the bills that you’ll be able to discharge (wipe out) in bankruptcy will fall into the nonpriority unsecured category, but not all of these obligations will go away. For instance, you won’t be able to get rid of your student loan balances unless you file a separate lawsuit and prove that you satisfy stringent standards that most people are unable to meet. (If you’d like to know more, see Student Loan Debt in Bankruptcy.)
When you fill out the bankruptcy paperwork, you’ll list both priority and nonpriority unsecured claims on official form E/F: Creditors Who Have Unsecured Claims.
(If you’d like more information about listing your nonpriority debts on your petition, read Completing Bankruptcy's Schedule E/F: Creditors Who Have Unsecured Claims.)