Priority Debts in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, priority debt is significant enough to jump to the head of the bankruptcy repayment line. Priority debt includes domestic support obligations and employee wages, and the Chapter 7 bankruptcy trustee must pay them before other commitments, such as credit card balances and medical bills. In this article, you'll learn more about:

• priority debt payment in bankruptcy
• how priority debt payment can help debtors, and
• common priority debts in Chapter 7 bankruptcy.

In Chapter 13 bankruptcy, priority debts get paid in full through the Chapter 13 repayment plan (the categories are the same).

How the Trustee Pays Priority Debts in Chapter 7 Bankruptcy

Most Chapter 7 bankruptcies are "no asset" cases, and the debtor doesn't have anything that the Chapter 7 bankruptcy trustee can sell for the benefit of creditors. But that isn't always the case. The trustee will review creditor claims and disperse the funds when money is available.

The trustee will pay two types of debts: priority unsecured debts and nonpriority unsecured debt. All priority debts must be paid in full before nonpriority unsecured debts can be paid, like medical bills, credit card balances, and personal loans.

For more information, read Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.

How Paying Priority Debt First Helps a Debtor

No one wants to lose property in Chapter 7 bankruptcy. But when it happens, the sting isn't quite so nasty if you have priority debts.

Why? Because most priority debts can't be "discharged" or erased in bankruptcy. You'll have to pay priority debt balances after the Chapter 7 case ends. But, because the trustee pays priority debts first, if you lose property, the sales proceeds will be applied to your priority debt first, leaving you less to pay after your bankruptcy case ends.

For example, suppose the trustee sells your RV for $15,000 and uses the money to pay toward your $20,000 recent income tax bill, which is a priority, nondischargeable debt. After your bankruptcy case, you'd owe $5,000 instead of $20,000 on your tax debt.

Find out more about keeping property in Chapter 7 bankruptcy and nondischargeable debts.

Common Priority Debts in Chapter 7 Bankruptcy

Priority debts that might come up in consumer bankruptcies include the following (amounts valid from April 1, 2022, through March 31, 2025):

• wages, salaries, and commissions owed by an employer up to $15,150 per person earned within 180 days of your bankruptcy filing
• contributions to your employees' benefit plans rendered within 180 days of your bankruptcy filing up to $15,150
• debts of up to $7,475 owed to certain farmers and fishermen
• up to $3,350 in deposits made for the purchase, lease, or rental of property or services for personal, family, or household use that were not delivered or provided
• alimony, maintenance, or support
• income taxes that became due within the three years before the bankruptcy filing date and taxes that were collected or withheld from an employee (trust fund taxes); also, customs, duties, and penalties owing to federal, state, and local governmental units, and
• claims for death or personal injury (not property damage) that came about because of your driving under the influence of alcohol or drugs.

To learn how other debts are treated in Chapter 7, see Your Debt in Chapter 7 Bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

Updated: October 23, 2022