Updated March 12, 2019
In Chapter 7 bankruptcy, priority debt is important enough to jump to the head of the bankruptcy repayment line. Priority debt includes things such as domestic support obligations and employee wages and must be paid before other obligations, such as credit card balances and medical bills.
Most Chapter 7 bankruptcies are “no asset” cases—the debtor doesn’t have anything that the Chapter 7 bankruptcy trustee can sell thereby leaving no funds to pay to creditors. But that isn’t always the case. When money is available, the trustee will review creditor claims and disperse the funds.
The trustee will pay two types of debts: priority unsecured debts and nonpriority unsecured debt. All of priority debt must be paid in full before any nonpriority unsecured debt—like medical bills, credit card balances, and personal loans—will receive payment.
For more information, read Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.
Most priority debts can’t be discharged in bankruptcy. So at the very least, if you have priority debt and lose property in bankruptcy, the value of the property will be used to pay down a nondischargeable debt. You’ll derive a benefit.
For example, a recent income tax bill is both a priority debt and a debt that can’t be discharged in bankruptcy. Getting the taxes paid off with property sale proceeds is a lot better than if the money were to go to pay off debts you could discharge in your case, like a credit card balance.
(To learn more about Chapter 7 bankruptcy, including when the trustee will liquidate your property and which debts aren’t discharged, see the articles on Chapter 7 Bankruptcy.)
Priority debts that might come up in consumer bankruptcies include (as of April 1, 2019):
To learn how other debts are treated in Chapter 7, see Your Debt in Chapter 7 Bankruptcy.