Filing for personal bankruptcy generally means wiping the slate clean when it comes to your outstanding financial balances. The legal process involves reviewing what’s defined as priority and non-priority debt, which also depends on whether you file Chapter 13 or Chapter 7 bankruptcy. Here is a guide on the differences between the two types of debt and how they’re impacted by each bankruptcy filing.

Priority Debt in Bankruptcy

This type of debt is referred to as unsecured, which means financial assets or real estate property are not used as collateral. For individuals, child support, alimony, DUI personal injury, and death claims are some of the most common types of priority debt. For businesses, the category includes wages owed to employees, tax obligations due three years prior to the bankruptcy filing, and amounts owed to an employee benefit plan.

In a Chapter 7 bankruptcy, priority debt that isn’t paid completely off will still be owed. The bankruptcy trustee, who is in charge of overseeing the financial case, determines the order in which each creditor is paid. 

For Chapter 13 bankruptcy filers, the debts must be paid in full through a designated payment plan. If the payments aren’t made, the bankruptcy request will typically be denied, and the case may be dismissed.

Non-Priority Debt in Bankruptcy

Debts within this category have a lesser financial urgency in a bankruptcy filing compared to their priority counterparts. Credit card balances, medical expenses, water and electricity bills, and unpaid rent are some common examples of non-priority debt. For businesses, unpaid legal claims involving negligence or breach of contract and some older tax debt may also count. 

If a Chapter 7 bankruptcy is filed, all or most of the non-priority debt is generally discharged. Unlike priority debt, the order of payment is not an issue since the outstanding balances may be eliminated.

Non-priority debt that isn’t discharged in a Chapter 13 bankruptcy is usually reduced to an amount significantly lower than what is owed. A payment plan is established for the debtor to meet the approval conditions of a Chapter 13 filing request.

For nearly 23 years, Greg Dunn, Bankruptcy and Debt Relief Attorney, has helped individuals navigate the process of getting back on solid financial footing. Based in Honolulu, he has provided personalized Chapter 7 and Chapter 13 bankruptcy guidance to Hawaii residents. Should you ever need his service, call (808) 524-4529 for a free initial consultation. You can also find additional information on his services online.