Try saying that title three times fast!
The right to an unconditional discharge of your debts is a cornerstone benefit of filing for bankruptcy protection. It would be nice if this right was limitless, but like all good things, the ability to discharge debt has some boundaries. Recent taxes, student loans, and alimony are just a few examples of debts which will not be discharged by bankruptcy. However, even within the broad class of non-dischargeable debts, there are two important categories: Priority and non-priority. The priority classification of the non-dischargeable debt will determine how the debt is treated in your Chapter 13 plan, and can make a huge difference in the ultimate success of your bankruptcy. The distinctions can be tricky, so always consult with an experienced bankruptcy attorney who will thoroughly analyze your debts and plan your bankruptcy accordingly.
So here's the skinny: Debts that are non-dischargeable are classified into two main categories by the Bankruptcy Code: priority debt and non-priority debts. As the name suggests, priority debt has to be paid before non-priority debt is touched. The most common types of priority non-dischargeable debt are domestic support obligations (such as child support and alimony), taxes incurred within the past 3 years, and debt related to personal injuries caused by drunk driving.
These categories can actually be quite helpful to you if you end up filing for Chapter 13 bankruptcy. Since you will pay for priority debt before you pay for non-priority debt, the rule will allow you to devote Chapter 13 payments to debts you would not be able to get rid of through bankruptcy anyway. On the other hand, priority debt has to be repaid in full over the life of the Chapter 13 plan, and if this makes your plan unaffordable, a Chapter 13 might not be an option. However, if you have a lot of income, a high amount of priority debt may be enough to help you pass the means test, frequently a hurdle for bankruptcy filers.
The majority of non-dischargeable debts are non-priority. Some examples include student loan debt, debts arising from intentional misconduct, divorce related obligation debts and some taxes. A non-priority non-dischargeable debt doesn't get special treatment in Chapter 13, so it cannot receive more money in a Chapter 13 plan than the other debts in the same category. Thus, in your Chapter 13 plan, you cannot pay more money to student loan debt than you do to unsecured creditors like credit card companies.
As you can see, the classification of priority vs. non-priority debts is an important factor to consider when planning your bankruptcy. If you are struggling with debt and would like to find out how bankruptcy can help you get back on your feet, contact a bankruptcy attorney today! Serving North Carolina residents, the Law Offices of John T. Orcutt offers a free initial debt consultation, and can help you sort out your priority and non-priority debts. Call today to set up an appointment. 1-888-234-4181.