Chapter 7 Generally

• To understand the significance of priority in Chapter 7 bankruptcy, you must first understand how Chapter 7 works overall. In a Chapter 7 filing, a bankruptcy trustee will sell all of your non-exempt property. If any of that property is security for a debt, the trustee will pay off that secured debt first. After the trustee pays off all of your secured debts, the trustee then pays off as many unsecured debts as possible. Priority is not important for secured debts, but it becomes vitally important for unsecured debts.
  
  

Secured Debts

• A debt is considered secured debt if there is collateral property associated with the debt. This means that you take out a loan and promise that if you don't repay the loan, then the lender has the right to take a piece of your property, called the collateral, and sell the property to pay off your debt. The most common types of secured debts are home mortgages and auto loans.
  
  An unsecured debt, on the other hand, is simply a loan without associated collateral. The most common types of unsecured debts are credit card debts, personal loans and student loans.
  
  

Chapter 7 Priority

• Before paying off any unsecured creditors, though, the trustee must determine what creditors have priority and what creditors are nonpriority. After paying off all secured debts, the trustee takes the remaining money, if any, and pays off priority creditors first. After priority creditors, the trustee pays off nonpriority creditors, assuming there is any money left to go around. Any debt not paid off is deemed legally discharged, meaning the debt simply goes away forever. In most bankruptcy cases there is not enough money to pay off all priority debts, and there is rarely money left over for nonpriority debts.
  
  

Priority Debts

• Priority debts come in many forms, including domestic support obligations such as child support or alimony, taxes such as income tax, sales tax and property tax, criminal fines and penalties such as speeding tickets, and, if you are an employer, money owed to employees for wages or retirement account contributions. There are other, more complex types of priority debts, such as the claims of certain farmers and fisherman, or claims for death or personal injury caused by the debtor's intoxication, but those types of debts are so rare that when they do arise it is best to seek the advice of a bankruptcy attorney.
  
  

Chapter 13

• As a practical matter, priority status is less important in a Chapter 13 case, but priority can still affect the amount of money a creditor receives. In a Chapter 13 case the trustee does not sell any of the debtor's property. Instead, the debtor creates a debt repayment plan and repays creditors according to that plan. Often the plan will provide for repayment in a reduced amount. However, a Chapter 13 plan is acceptable only if it provides creditors with at least as much money as the creditor would receive under Chapter 7. In other words, you have to run through a theoretical Chapter 7, which involves a determination of priority versus nonpriority status.