When you file for Chapter 7 bankruptcy, not all creditors are treated equally. Bankruptcy law sets out the order in which creditors are paid and gives certain claims priority over others. These are referred to as priority claims.
Read on to learn how priority debts are paid in Chapter 7 bankruptcy and to find a list of priority debts.
Priority Claims in General
Priority claims are identified in the bankruptcy laws by category. Some of the categories are specialized and will not be a factor in a regular consumer bankruptcy. Others, such as domestic support obligations and non-dischargeable tax claims are quite common. Some, such as wage and customer deposit claims, are common in small business bankruptcies.
How Priority Claims Are Paid in Chapter 7
With rare exceptions, the priority claim categories are paid from the top down. This means that the trustee will pay claims in the higher category in full or to the limit set by the bankruptcy law for that category, before the trustee starts paying the next category of priority claims.
Priority Claims: Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7. Some of the claims that fall into priority categories are debts that are not dischargeable. These include certain taxes and domestic support obligations. If these claims are not paid in full in the Chapter 7 bankruptcy, you will continue to owe them even after you receive your discharge.
Chapter 13. In a Chapter 13, all priority claims have to be paid in full through the plan. This means that the payments you make under the plan have to be sufficient to pay all of your back child support, taxes and other priority claims. If the payments will not cover these claims, your Chapter 13 plan will not be confirmed and your case will be dismissed.
The Categories of Priority Claims
There are ten categories of priority claims.
- Domestic support obligations. This includes child support and spousal support, including alimony.
- Administrative expenses. This includes the costs, fees, and expenses of administering the bankruptcy case.
- Gap claims. These are debts incurred between the time an involuntary bankruptcy is filed and the date the court approves the bankruptcy filing. An involuntary bankruptcy is a bankruptcy that creditors file against you rather than a bankruptcy you file for yourself. It is less common than a voluntary bankruptcy and the procedures are different.
- Wage claims. These are employee claims which include wages, salaries, commission, vacation, severance and sick leave earned. They are limited in amount to $11,725 and in time, to those portions of the claim earned within 180 days of the date the bankruptcy was filed or within 180 days of the date the business was closed, if the business was not operating at the time the case was filed.
- Employee benefit plan claims. These include amounts owed by an employer to an employee benefit plan and have the same limitations (amount and time) as the wage claims. They are only available if the wage claim limits were not fully used. For example, if the employees filed wage claims of $12,475 each, and the claims were paid in the bankruptcy, no further employee benefit claims would be paid as a priority for the employees because the priority wage limitation was reached.
- Grain farmer and fisherman claims. This is a specialized category and includes claims by a grain farmer against a grain storage facility and claims by a fisherman for the proceeds from the sale of fish. The grain claims are not limited. The fish claims are limited to $6,150 each.
- Customer deposit claims. This includes deposits placed by individuals for the purchase or lease of property or services for personal or household use, when the property or services were not delivered or otherwise received. These are limited to $2,775 per claim. Examples of these type of claims include layaway payments, home repair deposits, and deposits made to a travel agencies.
- Tax claims. These include, generally, taxes which came due within the three years prior to the bankruptcy filing. (To learn more, see Tax Debts in Chapter 7 Bankruptcy.)
- Claims for capital requirements due to a federal depository institutions. This is a specialized category and gives priority to claims of banks against people or businesses who are required to maintain the capital reserves of the bank.
- DUI claims. These include judgments and monetary claims for personal injury and death as a result of driving a motor vehicle or motor vessel unlawfully while under the influence of alcohol, drugs or other substances.