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. As such, debts are paid in strict order: priority debts, followed by secured debts tied to collateral, and finally unsecured debts, which are generally subject to discharge. 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?
Debts are prioritized in bankruptcy according to federal law, which determines the creditors are paid and which debts are eligible for discharge in Chapter 7 or Chapter 13. 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 unpaid alimony, child support arrears, 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.
Debt Priority Order
- Priority debts (paid first)
- Child support and alimony arrears must be paid in full
- Recent income taxes and certain government obligations must take precedence
- Failure to pay can result in severe legal consequences
- Secured debts (paid second)
- Backed by collateral like a home or vehicle
- Lenders can repossess or foreclose on property if unpaid
- Commonly includes mortgages, car loans, and secured lines of credit
- Unsecured debts (paid last)
- No collateral backs the debt
- Often partially repaired or fully discharged
- Includes credit cards, medical bills, and personal loans
Why This Order Matters for Your Case
- Priority order determines which of your debts will be paid first and which may be eligible for discharge
- Impacts whether or not you are eligible to keep certain assets
- Affects how much creditors recover during the bankruptcy process
- Helps determine if Chapter 7 or Chapter 13 is better
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.
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.
Key Differences Between Chapter 7 and Chapter 13
- Chapter 7 (Liquidation)
- Non-exempt assets are liquidated and sold to repay creditors
- Priority debts will be paid first if the funds exist
- Most unsecured debts are discharged within months
- Chapter 13 (Repayment Plan)
- Structured repayment plans last three to five years
- Priority debts must be repaid in full over time
- Secured debts may be incurred to avoid foreclosure and repossession
How Debt Priority Impacts Your Filing Strategy
- Individuals with significant priority debt may benefit more from Chapter 13
- Those with primarily unsecured debt can qualify for Chapter 7 debt relief
- Ohio exemption laws influence what assets you are eligible to protect
- A local attorney can help you determine the best option based on your income, assets, and debt owed
Examples of Priority vs. Non-Priority Debts in Ohio
Understanding how specific debts are categorized makes it easier to understand how your case will proceed and what you may owe following your bankruptcy case.
Common Priority Debts
- Domestic support obligations like child support and alimony
- Certain local, state, and federal taxes
- Wages owed to employees, including business-related cases
- Government imposed fines and penalties
Common Non-Priority Debts
- Credit card balances
- Medical expenses
- Personal loans without any collateral
- Utility bills and lease obligations
Contact an Experienced Bankruptcy Attorney Today
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. If you’re filing for bankruptcy in Franklin County or anywhere in Ohio, understanding how debt priority laws apply to your case is critical to protecting your financial future. 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.
