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In a Chapter 13 Bankruptcy, Certain Debts Get Top Billing

Many people who have suffered serious financial setbacks or have otherwise accumulated large amounts of debt turn to Chapter 13 bankruptcy as a way to settle old debts and turn over a new financial leaf. Your creditors may be lining up in hopes of recouping their money, but there are some situations where certain debts take precedence over others. These debts are commonly known as "priority debts," as these debts have priority over other secured and unsecured debts. The following elaborates on priority claims and how they can affect your bankruptcy proceedings.

Superpriority Claims

In a typical bankruptcy case, superpriority claims take precedence over other existing priority claims. The purpose of a superpriority claim is to ensure that a creditor still has his or her interests represented, especially in cases involving depreciating property. In essence, the superpriority claim brings that creditor to the very front of the line when it comes to the debtor fulfilling his or her debt obligations.

Any creditor can assert such claims as long as the claim in question is allowable in the bankruptcy proceeding and the bankruptcy trustee provided adequate protection. Said claim must also arise from a granted lien; a stay of action; or the use, lease, or sale of property.

Child Support and Alimony

In the vast majority of bankruptcy cases, child support and alimony obligations take priority over others, say for superpriority claims. Child support and alimony obligations, like other priority debts, cannot be discharged during bankruptcy. In addition, the automatic stay that usually applies to collection efforts for other debts does not apply to child support or alimony orders.

If you own any property that would normally be considered exempt throughout the bankruptcy proceeding (such as your home), it may still be in danger of being sold to satisfy any outstanding child support and alimony obligations you may have.

Costs Related to the Bankruptcy Case

Administrative costs pertaining to the bankruptcy case itself also take priority over other secured and unsecured debts. These costs typically include case-filing fees and other administrative fees charged by the court. Collection of these costs usually takes priority over settling other secured and unsecured debt, as payment may be required at various points of the case.

In some cases, the court may order that the administrative costs be deducted from the proceeds of your bankruptcy estate prior to for selling any other priority debt obligation. This way, the court can be certain that the costs of the bankruptcy proceeding have been paid for.

Tax Debts

Even in bankruptcy, it can be difficult to escape the tax man. If you've fallen behind on paying your federal taxes, then there's a good chance that Uncle Sam will get his due. Not only does this include the taxes you've failed to pay, but it also includes the penalties and interest that have accrued so far.

  • If you've incurred back taxes after filing your bankruptcy petition, these expenses may take priority over other debts.
  • If you've incurred back taxes within the past three years before filing your bankruptcy petition, these expenses may be treated as a lower priority.
  • Back taxes incurred over three years before filing the petition may actually be discharged in court, depending on the circumstances. 

Employee Wages and Benefit-Plan Contributions

If you have any unpaid employee wages and benefit-plan contributions to take care of, these debts may take priority over other secured and unsecured debts. However, there is a limit to the amount of debt you're immediately responsible for.

Section 507(a)(4) of the U.S. Code limits priority claims for employee compensation and benefit-plan contributions to $12,475 or less. Amounts up to $12,475 must be earned within 180 days prior to the bankruptcy filing date or the closure of the business, whichever occurred first. You'll also be responsible for wages, salaries, or commissions earned during that 180-day period.

Talk to a firm such as O'Brien and Dekker Attorneys at Law for more information.