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:
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.
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.
Priority debts that might come up in consumer bankruptcies include the following (amounts valid from April 1, 2022, through March 31, 2025):
To learn how other debts are treated in Chapter 7, see Your Debt in Chapter 7 Bankruptcy.
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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: March 31, 2022