Priority Creditors And Your Chapter 7 Bankruptcy Filing

12 January 2022
 Categories: Law, Blog


When a consumer files chapter 7, they usually expect their debts to be forgiven. Looking at things from a creditor's point of view, though, might help filers understand why the court has the power to seize assets during bankruptcy. Read on to find out more about priority creditors and why they matter to your bankruptcy case.

Bankruptcy and Creditors

Not all creditors are out of luck when a consumer files chapter 7. Firstly, not all debts can be included in a chapter 7 filing. Debts like child support, some recent IRS debts, student loans, legal debts, and other debts cannot be forgiven with a filing. Some creditors, though, enjoy a higher status than others. They are known as priority creditors, and they may get paid if the filer's assets can be taken.

Seizing Assets

Don't be alarmed, almost all filers sail easily through chapter 7 without losing any assets. They are usually protected by state exemptions, for one thing. For instance, many states exempt the filers' primary residence and vehicle from seizure. Another consideration is when the consumer still owes money on an asset. They may, for example, owe on their auto loan. When that happens, the value of the asset is determined by deducting the loan balance. In many cases, that makes the asset unattractive to the bankruptcy court and they won't bother with seizing it. However, if an asset is paid off or has a greater value than the loan balance, it could be seized if not protected by exemptions. If you have a lot of assets with low to 0 balances, talk to your bankruptcy lawyer about what could happen to them if you file chapter 7.

Who Gets Paid?

If assets are seized, the method used by the court to provide funds to the creditors is set up to provide money for some immediate needs but with less priority given to unsecured debts like credit cards. In general, that means the funds from any filer assets might go to pay these debts in order:

  1. Administrative Costs – Though all filers pay a filing fee, more is often needed to pay the full cost of administering a case.
  2. Taxes and More – Second, taxes owed to the IRS, the state, and the county are paid. If the filer owes back child support, the court may opt to pay towards that debt too.
  3. The Remainder – This final category of debt is seldom paid even when the filer is wealthy. It includes credit card debts, medical debts, personal loans, etc.

If you have assets that you think could be seized, speak to a bankruptcy law office to find out more.