Bankruptcy is a legal process in which the court helps the individual filing bankruptcy to organize and repay his debts. All debts are not created equal under bankruptcy law, however, and some debts and expenses are ranked higher in priority than others by the court. Priority claims are dealt with before non-priority claims when handling the debts in a bankruptcy.
Bankruptcy priority is established by Title 11, Section 507 of the United States Code. The priority system ensures that more important debts and obligations are paid first when filing for bankruptcy, and Section 507 defines both the items that have priority in bankruptcy proceedings and the order in which priority is assigned.
Domestic Support Obligations
Domestic support obligations, such as unpaid child support, alimony or other court-ordered support, have the highest priority in bankruptcy proceedings. This includes domestic support owed directly to the child, spouse or other recipient as well as support collected by a court or other government agency on their behalf. These obligations are paid first in a bankruptcy proceeding, and any other debts or obligations are paid afterward.
Administrative fees and expenses have second priority in a bankruptcy filing. These fees and expenses include property taxes, trustee's fees and other costs to the court. Legal fees, property maintenance costs and other expenses may be included in the administrative costs in the bankruptcy filing as well. This ensures that all costs to the court and government are paid before lesser creditors begin collecting payments.
Other High Priority Claims
Business expenses that arise between the time of a bankruptcy filing and the appointment of a trustee receive third priority, and wages or commissions due up to a predetermined cap based on cost of living calculations ($10,950 as of 2007) receive fourth priority. Fifth priority is given to employee benefit plan contributions, ensuring that any employees of the individual or company filing for bankruptcy receive the contributions they are due.
Lesser Priority Claims
Sixth priority goes to growers of grain or fishermen who rely on the debtor's holdings for storage or processing. Seventh priority is given to individuals who have placed deposits for property before the bankruptcy filing and did not receive or take possession of the property they were buying, leasing or renting. Eighth priority goes to government units assessing taxes while ninth priority is given to federal regulatory agencies maintaining deposits in a depository institution. Tenth priority goes to claims resulting from wrongful death or injury lawsuits related to drunk driving accidents.
After all priority claims are settled, payment or dismissal of other debts begins. The court-appointed trustee managing the bankruptcy procedure reviews the non-priority claims included in the bankruptcy and determines the best action to take. The debtor who filed for bankruptcy continues working with the trustee until all debts have been paid satisfactorily or dismissed, after which the bankruptcy is discharged.
- Photo Credit Bankrupt. Businessman with empty pockets (with clipping paths) . image by Vitaliy Pakhnyushchyy from Fotolia.com
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