Is Bankruptcy Worse Than Foreclosure?
When dealing with cases of bankruptcy, it is important to know that the law does not treat all debts the same. This is because debtors have different kinds of creditors to whom they owe money for a variety of reasons. It is because of this that debts fall into three categories: secured, general unsecured, and priority. This determines the order in which debts must be paid when debtors cannot repay them right away, beginning with priority debts. Please read on and reach out to our experienced Rockland County bankruptcy attorney to learn more about priority debts and how our firm can help.
Priority Debts
The Bankruptcy Code has a ranking of unsecured claims that determines the order in which they must be paid if the debtor does not have enough money to pay them all in full. Priority debts are a specific category that is treated more significantly than others. This is because bankruptcy law gives them higher priority over other general unsecured debts. Certain debts are made to be a priority because the money is usually owed to the government or because it is required by public policy.
Why Would a Debt Be Priority?
There are reasons as to why each debt is categorized the way it is. It is because of this that they are treated specially. For example, the most common priority debts in consumer bankruptcy cases include the following:
- Child or Spousal Support: This is made special because the state of New York strongly believes that children and former spouses are owed the financial support that is ordered by divorce courts. It is because of this that federal bankruptcy law incorporates the same policy into its practices.
- Income Taxes: These debts are special because they are considered debts to the public, not a private individual or business. These debts impact all people, which is why they are considered a higher priority compared to private debts. However, this is only a priority if it meets certain conditions, which are typically related to the age of the taxes. The newer the debt, the more likely it is to be classified as a priority debt.
The Full Order the Law Sets
Domestic support obligations and income taxes are the ones most consumers meet, but the Bankruptcy Code ranks priority claims in a fixed sequence, and each rung must be paid in full before the next receives anything.
- Domestic support obligations, meaning alimony and child support
- Administrative expenses of the case, including the trustee and other professionals
- Wages, salaries and commissions earned in the 180 days before filing, up to a capped amount per employee
- Contributions owed to an employee benefit plan, subject to their own cap
- Deposits taken from consumers for goods or services never delivered, up to a limit
- Certain taxes, including recent income taxes and trust fund taxes
- Claims for death or injury caused by driving while intoxicated
Priority and Nondischargeable are Not the Same Thing
People often confuse priority and nondischargeable debts, when in reality, they refer to different things. Priority determines who is paid first from the bankruptcy estate, while dischargeability determines if you still owe the balance once the case ends. A debt can be priority while being dischargeable, just as a nondischargeable debt may be a non-priority debt. Support obligations are both, whereas unpaid wages owed to former employees are high priority but still eligible for discharge.
Paying Priority Debts
Priority debts are paid ahead of general unsecured debts, though not ahead of secured creditors, who look first to the property backing their loan. Under Chapter 13 bankruptcy, priority debts must be paid in full, sometimes with interest, through the individual’s bankruptcy plan. Under Chapter 7 bankruptcy, the priority creditors must be paid first. If there is not enough money to repay priority debts, nonpriority debts may not be paid at all.
Contact our Firm
Bankruptcy, for many people, is a frightening endeavor. Fortunately, with the help of an experienced attorney, it does not have to be. If you require the services of an experienced Business Law or Bankruptcy attorney, contact the Law Offices of Allen A. Kolber, Esq., today to schedule a consultation and discuss your options. We will have your back every step of the way.
