A priority creditor means different things depending on the context in which the term is used. In all cases, it refers to the creditor that is paid first. In some cases, the law defines a priority creditor, while at times the priority creditor is determined by an agreement between the creditor and the borrower. Priority creditor may also indicate which creditor should be paid first in certain financial circumstances, without any legal definition.
A priority creditor is defined by law in a bankruptcy action. In a Chapter 13 bankruptcy, creditors receive payments from the debtor according to a court-approved repayment plan. Many of the unsecured creditors are paid only a portion of the outstanding balance, if they are paid at all. Secured creditors must be paid the full amount that they are owed if the debtor wants to keep the asset. Priority creditors are creditors that the law says must be paid back in full, even if not secured. Priority creditors include people who are due child support, or federal income taxes that are due.
In some situations, businesses may sign a creditor agreement that defines how different creditors will be treated in collection cases or bankruptcy. Creditors may agree to allow other creditors to to be paid first, for all or at least for part of their debt. This makes the creditor a priority creditor by agreement. These agreements are enforceable in civil court.
When Paying Bills
A debtor must be prepared to prioritize his creditors when he is having financial difficulties. The first bills to pay are any pertaining to housing or shelter. This includes utility payments. Food for the family is also one of the first expenses to pay. Transportation, involving car payments and other related expenses, would come next. Income taxes and child support would round out the listing of priority creditors in a financial emergency. If any money is left over, it can be distributed to the unsecured creditors.
Prioritizing According to Collection Efforts
Collection agencies for unsecured creditors know that a normal person would not pay an unsecured debt, like a credit card, before paying one of the priority debts. Therefore, they issue collection threats and continuously call the debtor by telephone in an attempt to badger him into paying them before paying one of the priority debts. A debtor should not let the collection agencies invoke an emotional response that causes him to pay debts out of priority order. Collections efforts should never dictate creditor priority.