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Both Chapter 7 and Chapter 13 bankruptcy can offer a practical path toward relief for those struggling to repay debts. If you decide to take this route, you’ll need to first review all the debts you carry and how they may be handled throughout the process. Of these balances, one important distinction you’ll make is between priority and non-priority debts. To better illustrate the role each of these financial obligations, here’s a quick review of their definitions and how they are treated during personal bankruptcy.

What Are Priority Debts?

A priority debt is one that is unsecured—or not backed by collateral that could be taken away if you default on the loan. These balances generally apply to important financial obligations that must be resolved in some fashion. As such, they tend to be handled first as bankruptcy decisions are made.

Some common examples of priority debts include:

  • Child support
  • Alimony
  • Some taxes
  • Official penalties or fines
  • Damages related to property and personal injury liabilities incurred from DUI charges
  • Unpaid wages and employee benefits contributions, if you’re the employer

What Are Non-Priority Debts?

chapter 13 bankruptcyNon-priority debts are also unsecured but don’t necessarily carry the same weight as priority debts. In most cases, these balances are acquired as financing agreements and are not the result of court orders or other official obligations.

Some common examples of non-priority debts include:

  • Unsecured credit card balances
  • Medical debt
  • Personal loans
  • Unpaid rent and utilities
  • Negligence or breach of contract judgments

How Are Priority & Non-Priority Debts Handled in Bankruptcy?

Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, an appointed trustee will liquidate accounts and other assets to pay off remaining balances. Priority debts are then paid off according to their level of importance, followed by non-priority debts.

If there aren’t enough funds to cover these claims, the debtor may still be held responsible for paying off priority debts. Non-priority debts, on the other hand, are typically discharged.

Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, assets may be retained, but the debtor must adhere to a feasible repayment plan to clear out balances, usually within a three- to five-year period. When determining the repayment plan, the individual must be able to pay off priority debts in full. If there are not enough funds to cover these obligations, the bankruptcy will be denied.

Non-priority debts may or may not be discharged. In most cases, the debtor will negotiate with creditors to pay a lower amount to eliminate the debt.

 

If you’re considering Chapter 7 or Chapter 13 bankruptcy, Pearce Law Firm will provide dependable support at every step of the filing process. Well-versed in bankruptcy law, these Foley, AL, attorneys will review your case in-depth to accurately assess your priority and non-priority debts to help you secure an optimal repayment solution. To learn more about the ways these lawyers can resolve financial troubles, visit the firm online. For a consultation appointment, call (251) 971-2676.  

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