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What Unsecured Creditors Should Know About Bankruptcy and Priority Debt

When a debtor files for bankruptcy, debts are repaid to creditors according to their “priority.” The U.S. Bankruptcy Code sets the order of priority for claims, which means that certain debts will be paid (or, in other words, certain creditors will be paid) before others. It is important for creditors in Columbia, South Carolina to learn more about how priority debts are classified and to understand how priority debts can affect payouts to creditors in bankruptcy cases.

How the U.S. Bankruptcy Code Defines Priority Debt

Under § 507 of the U.S. Bankruptcy Code, certain types of claims receive “priority” status, which means that they must be paid first out of the bankruptcy estate. Generally speaking, secured debt is not going to be in consideration under § 507 since those creditors typically can repossess property in order to pay off the debt owed. What kinds of debts, then, are priority debts? The U.S. Bankruptcy Code lists some of the following as priority debts:

  • Debt for domestic support obligations;
  • Administrative expenses tied to certain loans;
  • Certain wages, salaries, and commissions;
  • Certain contributions to an employee benefit plan;
  • Certain tax debt;
  • Certain penalties owed; and
  • Money owed from personal injury claims arising from DUI accidents.

There are other types of priority debts, too, and an experienced Columbia creditors’ rights lawyer can help you if you have questions about seeking the money you are owed. To be clear, whether a claim is classified as a “priority” depends on the type of debt that is owed (although priority debts typically are unsecured debts).

Priority Debts That Cannot Be Discharged

In some cases, creditors who are owed priority debts that cannot be discharged can be in a good position to get repaid when the debtor files for bankruptcy. For example, tax debt and child support debt are both “priority” debt, as are debts owed for personal injury judgments in DUI cases. As an example, most tax debt cannot be discharged in a personal bankruptcy case. Since it is not dischargeable but is also a priority debt, this means it will get paid before any creditor for a non-priority debt receives any money. Since the tax debt could not be discharged in the bankruptcy anyhow, getting paid out of the bankruptcy estate typically is a good thing because it means some of that debt will get repaid, whereas attempts to collect on that debt otherwise could prove difficult.

At the same time, creditors of non-dischargeable, non-priority debt can end up receiving nothing from the bankruptcy estate. It is rare for debtor to have funds to repay all creditors entirely. If this were the case, the debtor likely would not have filed for bankruptcy in the first place.

Regardless of whether you have a priority debt, in order to receive payment from a bankruptcy estate, an unsecured creditor must file a proof of claim, which registers the creditor’s claim against any assets from the bankruptcy estate. In the proof of claim, the creditor clarifies the amount it is owed and whether the debt has priority status.

Contact a Columbia Creditors’ Rights Attorney

If you have questions about collecting on a priority or non-priority unsecured debt from a bankruptcy estate, you should discuss your options with a Columbia creditors’ rights attorney as soon as possible. Contact Crawford & Von Keller Law Firm for more information.

 

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