What Is a Priority Claim in Chapter 7 Bankruptcy?
In Chapter 7 bankruptcy, the trustee pays priority claims first.
When you file for Chapter 7 bankruptcy, not all creditors are treated equally. Bankruptcy law sets out the order in which creditors get paid and gives certain claims priority over others. In this article, you'll learn about how priority claims get paid in Chapter 7 and 13 bankruptcy cases.
Priority Claims: An Overview
Bankruptcy law lists priority claims by category. Not all are used regularly, however. Some are so specialized that it's unlikely that they'll be a part of your case. By contrast, frequently used priority claims include domestic support obligations and non-dischargeable tax debt, and it's likely that you'll find a wage and customer deposit claim in a small business bankruptcy.
How Are Priority Claims Paid in Chapter 7?
Priority claims get paid according to their order of importance. The bankruptcy trustee--the official responsible for managing your case--will fully pay higher ranking claims before moving on to the next claim category.
Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7 bankruptcy. 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 bankruptcy. In this chapter, all priority claims must get paid in full through the plan. For instance, your plan payment will have to be sufficient to pay all of your back child support, taxes, and other priority claims. If the proposed payment isn't sufficient to cover these claims, your Chapter 13 plan won't get confirmed and your case will be dismissed.
Priority Claim Categories
The following is a list of the ten categories of priority claims, along with a brief explanation about each type.
- Domestic support obligations. Child support and spousal support (including alimony), fall into this category.
- Administrative expenses. This category 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. It's less common than a voluntary bankruptcy.
- Wage claims. Employee claims, including wages, salaries, commission, vacation, severance and sick leave earned. They are limited to $12,850 (as of April 2016) earned within 180 days of the bankruptcy filing date or within 180 days of the business closure, 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 $12,850 each (as of April 2016), 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 specialized category 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 and fish claims are limited to $6,325 per individual (as of April 2016).
- Customer deposit claims. Claims for 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 are limited to $2,850 per claim (as of April 2016). Examples of these type of claims include layaway payments, home repair deposits, and deposits made to a travel agency.
- 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 institution. This specialized category 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.