The bankruptcy code actually categorizes each and every type of debt into a pecking order. One of these categories is what is called a priority unsecured debt. This means they are special. Priority debts include taxes, criminal restitution, child support and spousal support, among others. Generally that means they are non-dischargeable (not forgiven). If you meet certain technical requirements, taxes are dischargeable.

Priority is much more than about dischargeability. It is about reorganizing your financial affairs in a manner that eliminates a nondischargeable debt. I know. You’re probably asking “How do I eliminate something you just said I could not get rid of”? Through Chapter 13. I love using Chapter 13 for someone that owes a pile of debt that includes priority unsecured debts.

Let’s say you owe $15,000 in arrears for child support, $10,000 for income taxes incurred last year, and $100,000 in credit card debt. We calculate your income and expenses and determine that you can afford to pay $500 a month for 60 months, i.e., $30,000. Since the priority debts in this case (child support and taxes) are not dischargeable, they must be paid in full.

Here, that works out pretty well because you are going to pay the Chapter 13 trustee $500 each month. The trustee in turn is going to take that money and distribute it to your creditor based on priority. The child support arrears are considered highest priority and would be paid first, followed by the taxes. Since the child support and taxes add up to $25,000, our five year, $30,000 plan will cover these priority debts.

If there is any money available after the priority debts are paid, they go to less important creditors such as general unsecured debts like your credit cards. In this example, the credit cards would get the remaining $5,000 (5% of what you owe them) during the final months of the plan. Since credit cards are dischargeable, the remaining $95,000 or 95% of the debt would be discharged upon completing all Chapter 13 plan payments.

Please note that the plan payment calculation I used as an example is oversimplified. Plan payment calculations are much more sophisticated than this example, but it serves to illustrate the general goal of dealing with priority debts.

Photo courtesy of Leo Reynolds.

Tagged as: child support, criminal restitution, nondischargeable, priority debts, priority unsecured debt, spousal support, taxes