Law Offices of Nicholas Gebelt

What Is A Priority Claim In A Chapter 13 Bankruptcy?

The concept of claim priority is independent of the chapter under which the debtor files. The various claim priorities are listed in section 507(a) of the Bankruptcy Code, and reflect the congressional intent that some types of debts should get better treatment than others.

Although the priority list is fairly lengthy, four occur with sufficient frequency that they are worth highlighting:

  1. Domestic support (which is given the highest priority);
  2. Administrative claims such as costs and fees incurred by a trustee administering the estate;
  3. Certain back wages and benefits owed to employees on the petition date; and
  4. Most tax debt.

A visual analogy may help to understand the priorities in a Chapter 13 (or Chapter 11) plan.

I’m sure you have seen a fountain that consists of a stack of bowls that increase in size from top to bottom. In the center of the top bowl is a water source. The water must fill the top bowl before the second bowl gets anything because it only gets the spill-over from the top bowl. The third bowl doesn’t get any water until the second bowl is full; and so on down the line.

In a bankruptcy plan of reorganization, the payout must be according to the priorities, with the top priority paid before the second, the second paid before the third, etc. However, in practical terms, the priority classes are paid simultaneously in a Chapter 13.

Two important caveats regarding priority tax debt:

  1. In a Chapter 13, priority tax debt must be paid in full over the life of the plan — which is typically sixty months — unless the taxing authority consents to different treatment; and
  2. In a Chapter 11, priority tax debt must be paid in full within sixty months of the petition date, unless the taxing authority consents to different treatment.

Since the Chapter 11 sixty-month period starts on the petition date, the Chapter 11 debtor with priority tax debt has a strong incentive to get the plan confirmed as soon as possible.

In either case, if the debtor has insufficient financial resources — either as future income, or as assets that can be liquidated — to pay the priority tax debt within the statutory time, the debtor cannot propound a feasible plan.

For more information on Chapter 13 Bankruptcy In California, an initial consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.

Attorney Nicholas Gebelt

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