Whether you file for Chapter 7 or Chapter 13 bankruptcy, it's important to determine which of your unsecured debts will be classified as priority debts and which will be assigned to the nonpriority category.
In Chapter 7 bankruptcy, priority debts must be paid before your nonpriority debts. And almost all priority debts cannot be discharged -- so you'll still owed them after the Chapter 7 bankruptcy is finished.
In Chapter 13 bankruptcy, you must pay your unsecured priority debts in full through your Chapter 13 repayment plan. So it's vital to know how much that will be.
What is Unsecured Debt?
Priority debt is always unsecured (secured debt has it's own special payment privileges in bankruptcy). An unsecured debt is one that does not have some property or asset serving as collateral -- or security -- for the debt. Secured debt, on the other hand, has property securing the debt. If you default on the debt, the creditor can take the property.
The two most common types of secured debt are mortgages car loans.
Common types of unsecured debt include credit card debt, student loans, medical debt, back rent, and utility bills.
Priority v. Nonpriority Debt
In bankruptcy, unsecured debt is further divided into priorty debt and nonpriority debt. Congress considers the payment of priority debts to be more important than payment of nonpriority debts. So these debts jump to the head of the line when it comes to payment in Chapter 7 bankruptcy. In Chapter 13 bankruptcy, priority debts must be paid in full through your plan.
Unsecured, nonpriority debt is at the bottom of the barrel when it comes to repayment. In Chapter 7, most, if not all, of this type of debt is discharged. In Chapter 13, most debtors pay pennies on the dollar when it comes to unsecured, nonpriority debt.
Types of Priority Debt
Here are the most common types of priority debt in consumer bankruptcies:
- Wages, salaries, and commissions that an employer owes to employees.
- Contributions to employees' employment benefit plans.
- Debts owed to certain farmers and fishermen.
- Alimony and child support.
- Certain types of recent taxes.
- Customs, duties, and penalties owed to a government entity.
- Death or personal injury claims caused by intoxication.
Types of Nonpriority Debt
Common types of nonpriority, unsecured debt include:
- credit or charge card debt
- medical debt
- back rent
- utility bills
- older tax debt
- student loans (these are usually not dischargeable, however)
- personal loans
- money judgments for breach of contract or negligence
- health club dues
- church or synagogue dues, and
- union dues.
If you're considering bankruptcy, you can find lots of free legal information in our Bankruptcy Law Center.