Law Offices of Nicholas Gebelt

What Is A Nonpriority Debt? What Are Examples Of Such Debts?


Let’s start by looking at what priority debts are; what’s leftover are nonpriority debts. The Bankruptcy Code includes in Section 507(a) a list of debts that Congress has chosen to give higher priority than other kinds of debts, and there’s even a hierarchy of priority within these debts. The idea is that if there are funds to be paid out, higher priority debts must be paid in full before lower priority debts get anything.

There is considerable overlap of priority debts and nondischargeable debts, though the terms are not synonymous. For example, student loans are not dischargeable, but they are not priority debts either.

For the most part, priority debts are not dischargeable in a Chapter 7.

In a Chapter 13 or a Chapter 11, you may have to pay priority debts in full unless the creditor accepts different treatment. At the top of the priority list is an obligation to pay domestic support. If you’re falling behind on your child support or alimony, that arrearage is a priority debt and will, therefore, not be dischargeable in your bankruptcy. Whether you’re doing a Chapter 13 or Chapter 11 plan, you’re going to have to pay that debt in full.

There are other kinds of priority debts. If you have a business that goes into a bankruptcy but still owes employees or former employees back wages or benefits — up to a certain dollar amount — that were earned during the 180 days prior to filing, that’s a priority debt. The reason such wages are given priority is the belief that employees should be treated better than other creditors. Otherwise, the employees will leave, and the business will fold because nobody wants to work for a business that doesn’t compensate its employees.

The eighth priority is certain tax debt. For a tax debt to be a priority tax debt, it must satisfy in mirror image both the three-year and the 240-day rules regarding dischargeability. The three-year rule says that if you’re going to be able to discharge a tax debt in bankruptcy, the return for the given tax period must have been due with extensions (if you got them) more than three years before the day you file the papers. The mirror image means that for a tax debt to be a priority tax debt, the tax return due date was less than three years before the bankruptcy petition date. The other requirement for a tax debt to be a priority tax debt is the mirror image of the 240-day requirement for dischargeability. In dischargeability, the tax you’re trying to discharge cannot have been assessed or have been assessable during the 240-day window immediately prior to the day you file the bankruptcy papers. For a priority tax debt, it means you’ve filed the bankruptcy petition less than 240 days after the date of the assessment.

The two-year rule for dischargeability of an income tax debt says that you must have filed the tax return more than two years before the day you filed the bankruptcy petition. The mirror image is that you have filed the bankruptcy petition less than two years after you’ve filed the tax return. Interestingly enough, that two-year mirror image is not a requirement for a tax debt to be a priority tax debt because it does not appear in Section 507(a) of the Bankruptcy Code in the list of priority debts. The two-year rule, of course, appears in Section 523(a) dealing with nondischargeable debts.

There is a fairly lengthy list in Section 507(a) of priority debts, and debts that do not fit within that list are called nonpriority debts. A simple example of a nonpriority debt is medical debt; there is no provision in Section 507(a) listing medical debt as being a priority debt. Most credit card debts are also not going to be priority debts. Secured debts are not listed in Section 507(a) and are treated, for the most part, separately. Though secured debt isn’t in the list of priorities, the secured creditor does have special rights attached to the collateral that secures the debt. Therefore, that creditor will be treated well based on that claim against the collateral. Technically, however, that’s not a priority debt because a secured debt is in its own category. There is, of course, more to the discussion of what priority debts are. You can always give me a call if you want to further discuss priority debts versus nonpriority debts.

What Criteria Determine If A Tax Is Nonpriority?

As I just stated, a priority tax debt is a debt on a tax in which the tax return was due less than three years prior to filing the bankruptcy papers and the tax was assessed or assessable less than 240 days prior to filing the bankruptcy papers. That means if you don’t wait long enough — three years plus a day after the tax return was due, and 241 days after the tax was assessed — to file the bankruptcy papers, then the tax is a priority tax. If, on the other hand, you did wait more than the three years after the tax return was due and you did wait more than 240 days after the tax was assessed, then the tax is nonpriority.

That doesn’t mean the tax is dischargeable. For it to be dischargeable, you also have to satisfy that two-year requirement, meaning you waited more than two years after you filed the return to file the bankruptcy papers. In most cases, if you file the return on time and satisfy the three-year rule, you will have satisfied the two-year rule. Sometimes, however, people file their returns late, meaning they satisfy the three-year rule and the 240-day rule for dischargeability, but not the two-year rule for dischargeability. In that case, even though it’s a nonpriority tax debt, it’s not dischargeable. Again, you have to satisfy all three: the three-year, two-year, and 240-day rules for dischargeability.

To summarize, a nonpriority tax debt is one that you’ve waited long enough after the date the return was due and long enough after the tax was assessed to file the bankruptcy papers. That makes the tax debt nonpriority.

For more information on Tax Debts in California, a free 20 Minute Phone Strategy Session is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.

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