Priority Claims in Chapter 7 Bankruptcy

Not all creditors are treated equally when you file for Chapter 7 bankruptcy. Bankruptcy law sets out the order in which creditors get paid and prioritize certain claims over others. This article explains how priority claims get paid in Chapter 7 and 13 bankruptcy cases.

Bankruptcy Priority Claims

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. You'll likely 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 pay higher-ranking claims completely before paying debts in the next lower-ranking claim category.

Chapter 7 vs. Chapter 13 Bankruptcy

Chapter 7 bankruptcy. Some claims that fall into priority categories aren't "dischargeable" debts that are erased in bankruptcy. These debts include certain taxes and domestic support obligations. If these claims aren't paid in full in Chapter 7 bankruptcy, you'll continue to owe them after receiving your "discharge," the order that wipes out qualifying debt.

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 won't cover these claims, the bankruptcy court won't confirm your Chapter 13 plan and will dismiss your bankruptcy case.

Priority Claim Categories

The following is a list of the ten categories of priority claims and a brief explanation of 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 include wages, salaries, commission, vacation, severance, and sick leave. The claim is limited to $15,150 earned within 180 days of the bankruptcy filing date or within 180 days of the business closure if the business was not operating when the case was filed. This amount applies to cases filed between April 1, 2022, and March 31, 2025.
• 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 $15,150 (for cases filed between April 1, 2022, and March 31, 2025), 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 $7,475 per individual for cases filed between April 1, 2022, and March 31, 2025.
• 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 $3,350 per claim for cases filed between April 1, 2022, and March 31, 2025. Examples of these claim types include layaway payments, home repair deposits, and deposits made to a travel agency.
• Tax claims. These include, generally, taxes that came due within the three years before the bankruptcy filing. See Tax Debts in Chapter 7 Bankruptcy to learn more.
• Claims for capital requirements due to a federal depository institution. This specialized category prioritizes claims of banks against people or businesses required to maintain the bank's capital reserves.
• DUI claims. These include judgments and monetary claims for personal injury and death due to driving a motor vehicle or motor vessel unlawfully while under the influence of alcohol, drugs or other substances.

Navigating Your Bankruptcy Case

Bankruptcy is an unusual area of law because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.

The forms and resources below will help you find more information. Also, you can use this list of Chapter 7 and 13 bankruptcy forms to see where this topic falls. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.

Need More Info?

We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer.

April 23, 2022