Priority Debts in a Chapter 13 Case

Posted by Kevin on July 26, 2020 under Bankruptcy Blog | Comments are off for this article

Chapter 13 gives you some advantages over Chapter 7 for paying your priority debts. 

 Priority Debts under No-Asset and Asset Chapter 7

Our last two blog posts dealt with priority debts in a No-Asset Chapter 7 case and in an Asset Chapter 7 case.  While there are certain Chapter 7 strategies which may be somewhat helpful in dealing with priority debts, it is far from a panacea.  Here are some of its shortcomings.

• You get only brief protection, or none at all, from your priority creditor(s). With income taxes, the IRS/state can resume collections when your Chapter 7 case is over. That’s only 3-4 months after you and you file the case. With child/spousal support, there is no protection at all: collection continues even during your Chapter 7 case.
• Because of this lack of legal protection, you have little or no leverage about the dollar amount of payments you pay on your priority debts. You are largely at the mercy of the IRS/state or the support enforcement agencies.
• In an asset Chapter 7 case, you have no control over the trustee’s sale of your asset(s). Plus you have to pay a significant amount for the trustee’s costs and fee. That reduces what goes to your priority debt(s).

The Benefits of Chapter 13

In contrast, Chapter 13, although not perfect, is better-designed for you to deal favorably with your priority debts. Here are its main benefits and advantages.

1. Ongoing Protection, for Years

The protection from creditors, called the automatic stay, lasts not 3-4 months but rather 3-to-5 years in Chapter 13. You can lose this protection under Chapter 13 if you don’t follow the requirements including making required payments in a timely fashion. But usually this sustained protection can be a powerful tool.  It forces otherwise very aggressive creditors like the IRS/state and support enforcement to cooperate, or at least to back off during the course of the bankruptcy.  Instead of these tough creditors having the law and the leverage on their side, Chapter 13 puts you much more in charge to formulate a plan that works for you.

2. Pay Monthly What You Can Afford to Pay

The practical leverage Chapter 13 gives you helps where it counts. It enables you to pay your priority debts under sensible and manageable payment terms. Priority debts are ones you have to pay regardless of bankruptcy. You mostly just wish that there was a way that you can spread these payments out. Chapter 13 can, under the right circumstances, provide that opportunity.

Here’s how it works.  You and your bankruptcy lawyer propose, and the bankruptcy judge approves a payment plan. (This approval comes after permitted input from the Chapter 13 trustee and your creditors.) This payment plan is mostly based on how much you can actually afford to pay the pool of your creditors. You have to pay all your priority debts in full, but you have 3 to 5 years to do so.

You generally pay nothing on your other unsecured debts until you pay your priority debts in full.  Under certain circumstances you may not be required to pay anything to general unsecured creditors. At the end of your case, if all payments are made and you otherwise comply with all the other requirements of Chapter 13, whatever you haven’t paid is discharged or wiped out. At that point you will have paid off your priority debts in full, and usually owe nothing to anybody.

3. Avoid Interest and Penalties

You can also avoid paying any interest or penalties on your priority debt(s) under Chapter 13.

For example, with recent income taxes, interest and penalties continue to accrue after you file your case.  But as long as there no prior-recorded tax lien, and you successfully finish your case, you don’t pay these additional interest and penalties. You only pay the initial priority tax debt.

Furthermore, in most situations the penalties that accrued before your Chapter 13 filing are not a priority debt. This portion of your tax due at the time of filing is treated as general unsecured debt.  This means it’s treated just like your unsecured credit cards or medical bills. You only pay it to the extent you have money available after paying the priority debts, if at all.

This combination—no accruing interest and penalties, and no penalties treated as priority—can significantly reduce how much you must pay. The less you have to pay as priority means the less you pay in your Chapter 13 payment plan. In bankruptcy speak, that means you need less money to propose a plan which is feasible.  Among other things, you need a feasible plan to be considered for confirmation.

4. Pay Priority (and Secured) Debts Ahead of (and Instead of) Other Debts

If you have secured debts —a vehicle loan or home mortgage arrearage, for example—you often can pay these ahead of the priority debts. Your priority debts generally just have to wait, as long as you are appropriately following the payment plan and pay the priority debts in full by the end of the plan.  Once again, in certain circumstances, the payment of secured and priority claims can lead to a discharge even if the general unsecured claims get nothing.