Part 1 — Priority Claims
People file bankruptcy because they can’t pay their debts. When a bankruptcy debtor doesn’t have enough money to pay all of its creditors in full, the Bankruptcy Code provides that certain types of claims will be paid before certain other types of claims (See: Creditors’ Bankruptcy Rights). Thus, in order to determine whether your claim will be paid, you often need to determine what type of claim you have. There are three initial questions to ask: (i) is my claim secured or unsecured; (ii) is my claim entitled to any “priority”; and (iii) is my claim dischargeable.
A secured claim is a claim for which the lender has taken a security interest in collateral. Common types of security interests include a residential mortgage or a motor vehicle lien. Whether your claim is secured or unsecured depends not only on the validity of the security interest but also on the value of the collateral. You’re more likely to recover on a secured claim than an unsecured claim; however, the analysis of whether or not a claim is secured can be complicated. We’ll explore those issues further a future post.
Section 507 of the Bankruptcy Code sets forth certain types claims that are entitled to priority status. The following priority claims are generally paid in the following order:
- Domestic Support Obligations such as child and spousal support,
- Costs of administering the bankruptcy estate such as auctioneer’s fees,
- Expenses incurred in the ordinary course of a debtor’s business following an involuntary bankruptcy,
- Up to $12,000 of wages earned within the last 180 days;
- Up to $12,000 of contributions to an employ benefit plan;
- Certain claims of family farmers and fishermen;
- Up to $2,600 of pre-petition security deposits for services that were never provided;
- Certain unsecured tax claims;
- FDIC-related claims; and
- Personal injury claims based on DWI or BWI.
This list is not exhaustive; certain other claims might be entitled to priority depending upon the circumstances of the case. Of these ten categories of priority claims, Domestic Support Obligations, Costs of administration, and tax claims arise most frequently. Each of these types of priority claims bears further examination in a separate post. If you believe your claim against a bankruptcy debtor is entitled to priority, be sure to submit a proof of claim and mark the box that designates it as a priority claim.
To learn more about priority claims in bankruptcy, please contact the attorneys at Carter & Carter Law in Wilmington today: 910-763-3626