For individuals facing an overwhelming amount of debt, Chapter 7 bankruptcy can be a phenomenal way to regain financial stability. It allows one to leverage their assets in order to repay their creditors while retaining ownership of their most valuable possessions.
However, even in this instance, not every creditor or debt holds the same priority. Bankruptcy in general is a highly structured process with a carefully orchestrated payment hierarchy. So, the logical question here is “Who gets paid first?”
To understand where your money goes, first, you need to grasp the concept of priority debt. Do note that, while this guide will give you an excellent baseline, you should still seek the counsel of adept Chapter 7 bankruptcy lawyers near you to ensure a smoother process.
Who gets paid first in Chapter 7?
California bankruptcy laws define two types of debts:
- Secured debts are loans or obligations that are backed by collateral, which the lender has a legal right to seize in the event of non-payment.
- Unsecured debts, in contrast, lack specific collaterals, meaning that they aren’t tied to a specific asset that a lender can claim in case of default.
As you may know, Chapter 7 bankruptcy involves the liquidation of assets to repay these debts. However, the order in which creditors get paid is not arbitrary. There’s a clear-cut “pecking order” which can be divided into three tiers.
Top tier: Secured creditors
These are creditors who have a security interest in a specific property, such as a mortgage lender with a claim on a house or an auto loan provider with a lien on a car. In Chapter 7, the liquidation begins with satisfying the claims of these secured creditors. The rationale here is straightforward: the secured property is sold, and the proceeds go towards settling the debt.
Middle tier: Unsecured priority creditors
Once the secured debts are taken care of, the spotlight then shifts to unsecured priority debts. Although these debts aren’t backed by collateral, they still hold a higher status than general unsecured debts, mainly due to their societal importance.
Bottom tier: General unsecured creditors
This group encompasses debts like credit card balances, medical bills, and personal loans without collateral. In the majority of Ch7 cases, general unsecured creditors receive only a fraction of what they are owed (if anything at all). The distribution here is pro-rata, meaning each creditor in this category gets a percentage of the available funds remaining, based on the total amount of owed debt.
What are the priority debts?
As mentioned, priority debts are a subset of unsecured debts, that hold a higher rank in the payment hierarchy. The reason for this is that they emphasize the importance of family support, tax obligations, and certain legal responsibilities.
The bankruptcy code clearly delineates specific types of debt that fall under this category. These are, in order of priority:
- Domestic support obligations: Child support and alimony are non-dischargeable in bankruptcy as they are considered essential for the dependents’ well-being.
- Certain taxes: While some taxes are dischargeable under Ch7, some are considered priority. An excellent example is income taxes that became due within three years preceding the bankruptcy filing.
- Wages, commissions, and employee benefits: California bankruptcy laws recognize the significance of ensuring individuals get paid for their work, which is why these types of debts are given priority status.
- Claims for death or personal injury resulting from DUI: These claims take precedence over general unsecured debt since the California legal system reinforces the standpoint that (reckless) actions have consequences even in bankruptcy.
- Certain penalties and fines: Typically, this refers to obligations imposed by governmental bodies, such as penalties assessed by regulatory agencies or fines for breaking laws.
Who are the top-rated Ch 7 bankruptcy lawyers near me?
Whether you’re seeking a fresh start through Chapter 7 or need a structured repayment plan under Chapter 13, Bankruptcy Law Offices of Mark L. Miller are here to guide you through the proceedings with expertise and precision.
After 25+ years in the business and thousands of successful cases behind us, we possess the knowledge and experience necessary to help you navigate the complexities of California’s bankruptcy laws, from passing the means test to the final resolution of your process.
Our services are available from anywhere from Nestor to San Pasqual Valley and our specialists are quick to jump to action and secure your financial future. Reach out to us today!