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What Are ‘Priority Claims’?

New York bankruptcy requires debtors to pay some creditors what they are owed before others. These are called “priority claims” or “priorities” in the Bankruptcy Code. In chapter 13, for instance, creditors with priority claims must be repaid in full. Consequently, it’s important for debtors to have an idea of what these kinds of claims are—and their order of payment—so they can plan their bankruptcies accordingly. The list can be found in Section 507 of the Bankruptcy Code and are summarized here:

(1)  Domestic support obligations that are owed to a person

(2)  Domestic support obligations that are either assigned to a governmental unit by the person to whom they are owed, or owed directly to a governmental unit

(3)  Administrative expenses of the trustee and the bankruptcy

(4)  Claims held by Federal Reserve banks for loans made under certain government programs (this is very uncommon in a personal bankruptcy)

(5)  In an involuntary bankruptcy, post-petition debts that are incurred in the normal course of the debtor’s business

(6)  Up to $13,650 earned by each person or business working for the debtor

(7)  Claims for contributions to employee benefit plans amounting to $13,650 for each employee

(8)  Up to $6,725 for each person who either sells grain or fish to a grain storage facility or fish storage or processing facility, respectively

(9)  Deposits to the debtor up to $3,025 each for use of property or services that were not provided

(10)  Taxes owed to governmental units

(11)  Commitments to a Federal depository institutions regulatory agency for maintaining the capital at an insured depository institution (an example is capital adequacy requirements for banks to qualify for protection by the FDIC)

(12)  Claims owed for death or personal injury by the debtor if he or she was intoxicated

An important point is that these claims are not secured by any collateral. This means that even in a chapter 7 bankruptcy, the creditors holding these claims will be paid out of the bankruptcy estate before any creditors with unsecured, non-priority claims—like credit card debts, gambling debts, medical debts, and student loans. Thus, substantial priority claims can create obstacles for debtors for a few reasons. One, in chapter 13 bankruptcies, trustees insist that some distribution go to non-priority, unsecured creditors, which can raise the amounts required in the repayment plan. Two, unsecured, non-priority claims such as student loans might be non-dischargeable, so they will survive the bankruptcy requiring debtors to pay on them.

On the other hand, one of the most common priority claims are tax debts, which can be paid in full without interest in chapter 13. This is one of the advantages of that chapter over chapter 7.

If you have substantial unsecured priority debts, you need the help of an experienced New York bankruptcy lawyer to help you navigate your way through your case.

For answers to more questions about priority claims in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced landlords rights in bankruptcy Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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