When Life Gives You Lemons — Call an Attorney

Chapter 13 bankruptcy can be an effective tool for managing and eventually eliminating your debts, especially if you've fallen behind due to a short-term financial setback. During the proceedings, it's up to your creditors to file proof of claim in order to collect on an outstanding debt. However, certain debts take precedence over others.

These debts are arranged in order of importance according to Title 11 Section 507 of the U.S. Code. The following explains what these debts are and why they take precedence over other debts to be paid back during Chapter 13 bankruptcy.

Domestic Support

If you file for Chapter 13 bankruptcy and owe back child support or alimony, it's almost certain that the courts will order you to take care of these obligations first and foremost (unless a super priority claim takes precedence). Most bankruptcy courts consider child support, alimony and other domestic support obligations to be priority payments that not only take precedence over other claims, but are also non-dischargeable.

There are several other aspects of domestic support obligation claims that reflect their priority in terms of debt repayment. Not only are these claims exempt from the automatic stay that stops most other collection efforts, but these claims can also be enforced against exempt property. In other words, any exempt property you may own, such as your own home, could be sold to satisfy any outstanding child support or alimony obligations.

Administrative Costs

After your domestic support obligations, you'll have to deal with the administrative costs of the bankruptcy case itself as a priority debt. After all, you won't be able to get far in your bankruptcy case if you're unable to pay the case filing fee or other administrative fees required of the court. Administrative expenses may even be deducted from the bankruptcy estate before other debt obligations are taken care of.

Employee Wages and Benefits Contributions

If you own a business, you may also be obligated to take care of any unpaid wages and contributions to employee benefit plans prior to handling other secured and unsecured debts. According to Section 507(a)(4) of the U.S. Code, you may have to pay up to $12,475 per employee to cover wages for the 180-day period leading up to your bankruptcy filing or cessation of business operations. You'll also have to take care of any unpaid employee benefit plan contributions up to the aforementioned amount.

Taxes

If you're filing for Chapter 13 bankruptcy, then there's a good chance you may be behind on your federal taxes. Back taxes, along with penalties and interest, are a major debt that usually takes priority over other secured and unsecured debt claims. However, this depends on the actual status of your tax obligations.

Taxes incurred after your bankruptcy petition was filed and the bankruptcy case itself pending are usually treated as the second-most prioritized administrative expense. However, taxes that were incurred prior to the petition filing date take lower precedence. Taxes incurred over 3 years prior to the filing date are not prioritized and, unlike priority tax claims, can be discharged.

Super Priority Claims

Keep in mind that there are several exceptions to the above. These exceptions come in the form of super priority claims, which specifically outweigh claims that already take priority in a Chapter 13 bankruptcy proceeding. For instance, if your creditor has a debt secured by depreciating property, said creditor may be entitled to not only receive adequate protection payments, but also have their claims take precedence over all others if such protection proves inadequate.

Such prioritization of debt is designed to ensure that your most important debt obligations are covered before handling any other secured or unsecured debt in bankruptcy court. For further information and advice, contact a lawyer, such John G Rhyne Attorney At Law, who has experience handling bankruptcy cases.