In bankruptcy, priority unsecured debts are treated differently in two ways. First, as the term suggests, creditors with priority unsecured claims get priority over general unsecured creditors. For example, in a Chapter 7 case with assets to be distributed, priority claims are paid first. Other unsecured creditors will only get what’s left over after priority claims are paid. If there isn’t enough to go around, the nonpriority claims don’t get paid.
Some of the most common types of priority unsecured debt include:
Other domestic support, such as alimony
Certain income taxes, depending on age and whether they were timely filed
Certain other taxes, including some property taxes
Personal injury and wrongful death claims associated with driving while intoxicated
Although you’ll often hear unsecured debts grouped simply as priority and nonpriority, priorities are ranked. That is, the first-priority creditor claims are paid first, then second priority, and so on. Nonpriority unsecured claims come behind the lower-ranking priority claims.
Domestic support obligations, including child support, top the list. Administrative costs of the bankruptcy trustee and certain other administrative expenses necessary to preserve the bankruptcy estate follow.
Many of the other types of unsecured debt the U.S. Bankruptcy Code prioritizes don’t apply to most consumer bankruptcy cases. For example:
Unpaid wages, salaries, and commissions
Certain contributions to an employee benefit plan
Certain other taxes, including some excise taxes
Some customs duties
Deposits for certain types of services that were not provided
Any unsecured debts that are not listed in Section 507 of the U.S. Bankruptcy Code are classified as “general unsecured claims.” General unsecured claims are sometimes called “nonpriority claims.” These are the types of debt that are typically wiped out in a Chapter 7 case. Some common examples include:
Credit card debt
Past-due rent and utilities
Other unsecured personal loans
All unsecured debts are listed on Schedule E/F in the bankruptcy filing. But, unsecured priority claims and nonpriority claims are listed in separate sections.
For most Chapter 7 bankruptcy filers, the order of priority among priority unsecured debts isn’t important. That’s because most Chapter 7 bankruptcy cases are “no asset” cases. That means the bankruptcy filer doesn’t have any assets the trustee can take to pay creditors. In those cases, unsecured creditors don’t receive any payment through the bankruptcy case--not even those with priority claims. When no one is getting paid through the bankruptcy case, it doesn’t matter who would have been first in line.
For most consumer bankruptcy filers, the bigger concern is that most priority unsecured debts are nondischargeable. That means they’re not eliminated in a Chapter 7 bankruptcy case, and generally must be paid in full in a Chapter 13 case.
Most Priority Debts are Nondischargeable
While nonpriority unsecured claims are discharged at the end of a successful Chapter 7 case, most priority unsecured debts aren’t dischargeable. After the bankruptcy discharge, the bankruptcy filer is still responsible for any arrearage in domestic support obligations, priority tax debt, and most other priority claims.
It’s worth noting that priority claims aren’t the only type of debt that survives the bankruptcy process. Student loan debt is a nonpriority unsecured debt. Yet, student loans typically can’t be discharged in bankruptcy.
How Does Priority Debt Affect a Bankruptcy Filing?
Nonpriority debts don’t change eligibility for bankruptcy or the bankruptcy process. But, they may help determine how useful bankruptcy will be for a particular person or couple. Those who have mostly general unsecured debts often choose Chapter 7 bankruptcy. But, those who are hoping to resolve priority unsecured debts and other nondischargeable debts may not benefit from Chapter 7.
For some seeking to manage priority unsecured debts, Chapter 13 can provide a solution. This type of debt generally can’t be discharged in Chapter 13, either. However, delinquent balances on priority unsecured debts may be paid off over time in a Chapter 13 bankruptcy plan.
In either type of consumer bankruptcy case, the filer must submit schedules with the bankruptcy petition, or soon after filing. On Schedule E/F, the bankruptcy petitioner must disclose all unsecured debts. Creditors are then notified, and have an opportunity to file a proof of claim.
In a no-asset Chapter 7 case, many creditors won’t bother to file a proof of claim, since there are no funds to be distributed. In a Chapter 13 case, a proof of claim is required for a debt to be included in the repayment plan. In some circumstances, the bankruptcy petitioner benefits if an unsecured creditor doesn’t file a proof of claim. But, when the debt is nondischargeable, that’s generally not true. Most priority unsecured debts survive bankruptcy, even if no proof of claim is filed. Chapter 13 filers with this type of debt will usually want to make sure a proof of claim is filed, so the debt can be included in the repayment plan.