When you file for bankruptcy, it’s important to understand that not all debts are treated the same. Some creditors may have legal protections in place to ensure they recover the funds they are owed, while others may be prioritized because of collateral property involved. Regardless, understanding how debts are prioritized during bankruptcy can help you better understand what you can expect during this process. Additionally, you’ll learn the importance of working with experienced Franklin County bankruptcy lawyers to help you navigate these complex times.
Why Are Debts Prioritized During Bankruptcy?
During bankruptcy, certain debts are prioritized over others. This is because there are certain legal protections and rights in place that allow certain creditors to ensure they recover the funds they are owed when someone files for bankruptcy.
Generally, priority debts are paid first. These are typically the most “serious” debts, as they often carry harsh implications if they remain unpaid. As such, the debts that are often paid first include overdue rent, child support arrears, utilities, and outstanding taxes.
Next, secured debts are paid off, as these typically have collateral attached. This is common in outstanding car payments or home equity loans. Finally, unsecured and non-priority debts are paid last, as these often include medical bills, personal loans, and credit card debts.
Understanding how these debts are repaid can help ensure that you understand what will happen to your assets during this process. While you may be able to have certain debts discharged, meaning you will no longer have a legal obligation to repay the debts, others will require full repayment during the process. This can also help you and your attorney determine the best chapter for you to file.
Does the Priority of Debts Change Between Chapter 7 and Chapter 13?
It’s important to understand that, due to the differences between Chapter 7 and Chapter 13 bankruptcy, you’ll find that the priority of debts may change. During chapter 7, which is a liquidation process in which your non-exempt assets will be seized and sold so the funds can be applied to your debts, priority debts must be paid in full if there are enough non-exempt assets to do so. If there are no remaining priority or secured debts left, the remaining assets may be used to repay non-priority and unsecured debts; otherwise, they will be entirely discharged. Chapter 7 is ideal for those who have few assets and many unsecured debts.
However, during Chapter 13, you will be placed on a three- to five-year repayment plan. As such, your priority debts must be paid in full over the course of this plan. Similar to Chapter 13, non-priority and unsecured debts may only be paid if the filer has a large disposable income. Chapter 13 is ideal for those with priority debts, as it allows the filer time to catch up on their payments while receiving the protection of the automatic stay.
As you can see, navigating bankruptcy can be incredibly complicated, as there are a number of factors that can influence the process and the outcome. That is why it’s in your best interest to connect with an experienced attorney with Cousino & Weinzimmer. Our team understands how overwhelming bankruptcy can be, which is why we will walk you through this process to help you reap the full benefits of filing. When you need help, contact us today.
