Priority is the P word in my Bankruptcy Alphabet.
Priority is the order in which claims of creditors are paid in a bankruptcy case.
While all people may be created equal, not so for claims. Recent income taxes and unpaid child support are among the priority claims that get paid first and in full before other creditors receive any money from the bankruptcy estate.
Priorities are set out in Section 507 of the bankruptcy code. All the claims in each priority are paid in full before the claims with the next highest priority get anything.
This ordering of payment usually works to the debtor’s advantage because the most common priority claims, taxes and support, are also non dischargeable.
So in Chapter 7, if the support claim isn’t brought current, the unpaid balance remains an enforceable debt. In Chapter 13, to be confirmed, a plan has to provide for payment in full for priority claims.
In my view, the biggest shortcoming in this system is the treatment of student loans. Student loans do not have a priority for payment, but they are generally non dischargeable.
One of the few reasons to file a Chapter 7 bankruptcy for a corporation is grounded in claim priorities. I may recommend a Chapter 7 when a corporation’s unsecured, non priority creditor employs the law to get payment for itself, ahead of tax claims that would have a priority for payment in bankruptcy.
This becomes important to the officers of the corporation when the unpaid taxes are trust fund taxes. The individuals who run a corporation may be personally liable for paying the trust fund tax portion of payroll taxes, though they aren’t liable for the rest of the corporation’s debts. A bankruptcy filing makes sure that the priority tax claims get paid first.
On the non statutory side of things, as a bankruptcy lawyer, I am looking for ways to make it a priority for clients to get me all of the information I need to do their bankruptcy papers well.
This post was brought to you by the letter P.
The instigator of this alphabet madness, Jay Fleischman, thinks P is for Pay Advice.
Image courtesy of Leo Reynolds.