Priority Debts in Chapter 13 Bankruptcy
Feb. 25, 2013
Chapter 13 can be a stronger and more flexible tool for dealing with priority debts than Chapter 7.
The last blog explained how sometimes Chapter 7 can be a good tool to pay or reduce your priority debts. Priority debts are ones specially designated in bankruptcy law to be treated better than you ordinary debts.
For consumers, the most common priority debts are back child/spousal support payments and taxes. But as the last blog showed, you need to have a relatively unusual “asset” Chapter 7 case, meaning that you need to have an asset or assets that is not protected—not exempt—that you would surrender to the trustee.
It helps if when that asset is sold by the trustee the sale proceeds would be enough to pay off your priority debts, after paying any costs of sale (such as a broker’s commission) and the trustee’s fee.
Chapter 13 is much more likely to apply to your circumstances if you owe a bunch of priority debts.
Here are some ways that it is better than Chapter 7, and better than trying to pay your priority taxes or back support without any bankruptcy.
1. Be protected from the priority creditors: Tax authorities and state support agencies have been provided by law with extraordinarily aggressive collection powers against you. These often include the ability to seize your assets; garnish your wages, bank accounts, and business receivables without additional court proceedings; suspend your driving and occupational/professional licenses, and even hunting and fishing licenses.
Some of these collection efforts can even continue when you file a Chapter 7 case, and all can continue as soon as your Chapter 7 is completed, giving you just a three-month or so break. In contrast, Chapter 13 stops virtually all of these collection efforts, so long as you comply with the terms of your payment plan, as well as keep current going forward.
2. Stop further accumulating interest and penalties: Usually in a Chapter 13 case, the interest and penalties on priority debt stops being added, and then is discharged at your successful completion of your case. If you have large income tax debt, this can significantly reduce the amount you would pay.
3. Get a more sensible budget: Your monthly obligation under Chapter 13 tends to be based on more realistic expenses than what the IRS or your support enforcement agency will allow..
4. Allows you to favor the priority debt over other debt: Usually you are able to and indeed must pay your priority debt ahead of and often instead of your “general unsecured creditors.” So you are able to concentrate your financial efforts on paying off the debts that are usually in your self-interest to pay anyway.