Priority Claim: Everything You Need to Know
A priority claim is a type of claim that, in the event of bankruptcy, is treated differently than other claim types.3 min read
A priority claim is a type of claim that, in the event of bankruptcy, is treated differently than other claim types. Bankruptcy has three types of claims: priority, secured, and unsecured.
What Is a Priority Claim?
A priority claim cannot be discharged in a bankruptcy case and receives special treatment. Most priority claims are one of these three:
- Tax requirements
- Child support
In the most common form of bankruptcy, Chapter 7 bankruptcy, priority claims are paid before any other unsecured, general claims. Even after a person has filed for bankruptcy, they are required to pay priority claim debts. Chapter 13 bankruptcy allows priority claims to be paid throughout the repayment plan until they are paid back in full. The repayment plan must include the payoff of priority claims, so if it's a short plan with a lot of priority claims, the payments might need to be fairly high.
All claims are requested by a creditor for debt repayment, but priority claims have preferential treatment over all other types of claims. If someone owes you money for a car you sold them, and they file for bankruptcy, they'll be required to pay any child support or other priority claim types first before paying you for the car.
What Is a Priority Unsecured Claim?
Unsecured claims still take priority over other debts that the person may owe, but they aren't secured with collateral. These claims usually have priority for public policy reasons, where the public would otherwise be harmed by unpaid debts.
A priority unsecured claim is a claim that is not being held with the use of collateral, but it still is more important than other claim types. Non-dischargeable claims are those that a person still owes after bankruptcy. Basically, if you owe taxes, child support, or spousal support, filing for bankruptcy will not get you out of those debts.
How Are Priority Claims Processed?
Before they can collect any payments, a creditor has to submit a form called "proof of claim" to the court. If the creditor believes their claim to be a priority, they'll need to indicate that in the priority status box on the form. The trustee will review the claim as the bankruptcy court's court-appointed overseer of the case.
All types of bankruptcy claims, no matter the chapter type, are due within 30 days after the meeting of creditors required by section 341 of the Bankruptcy Code. The priority claims filed must be paid in order of their importance. Payment of these claims is carried out by the bankruptcy trustee assigned to the case.
In the case of Chapter 7 bankruptcy, any priority claims not paid before the discharge will still need to paid by the debtor. Chapter 13 bankruptcy requires full repayment within the time set out by the repayment plan. The only way a Chapter 13 repayment plan will be approved is if all priority claims are paid back before the end of the plan.
Other Types of Priority Claims
Alimony and child support claims are some of the most common priority claims, but there are other types of priority claims in bankruptcy, including:
- Gap claims
- Wage claims
- Employee benefit claims
- Grain farmer and fisherman claims
- Customer deposit claims
- Tax claims
- Capital requirement claims
If the individual filing for bankruptcy incurs any additional debt after they file, but before the court approves the filing, these debts fall under gap claims. Wage claims come into play when a business files for bankruptcy. This is usually categorized under Chapter 11 bankruptcy. Any wages, salaries, vacation pay, sick leave pay, commissions, or severance earned by employees must be paid if earned 180 days before or after the business closed or filed for bankruptcy.
Employee benefit claims are similar to wage claims. If an employer owes payment to employee benefit plans when they file for bankruptcy, these debts are categorized as employee benefit claims, but they're only paid if the limit wasn't reached in paying off the wage claims.
Any taxes due before an individual or business files for bankruptcy are considered priority claims. This is limited to taxes due within a certain time period set to three years before the filing.
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