Bankruptcy Debts: The Pecking Order

As a chapter 7 filer, the way the bankruptcy courts look at your debts might not matter. However, if you run into problems with the discharge of a certain debt, some background info might be helpful. To gain a better understanding of how bankruptcy views debts, here's what you should know.

Why Debt and Creditors Matter to the Trustee

When you are considering bankruptcy, the filer and the bankruptcy trustee have two vastly different viewpoints. For your purposes, you want to include as much of your debt load in the bankruptcy filing as possible. For the trustee's purposes, it's vital to keep the creditor's losses to a minimum. The way they do that is by using the filer's assets to help pay off some of the debt. In addition, there are certain expenses connected to the bankruptcy process that may not be covered using the filing fee all filers pay the federal court system.

Using the Filer's Assets

You may have noticed the above phrase and wondered what it meant but don't be alarmed. In most cases, filers don't end up losing any of their property because they use exemptions to reduce their assets in play. For example, a filer might be able to keep their home because the entire primary residence is exempted in that state. If the filer has assets falling outside the exemption limits, they might have property that is subject to seizure. When that happens, the trustee sells the asset and uses the funds to cover some of the following debts:

Administrative Bankruptcy Debts: This may the highest priority of all bankruptcy debts. This category can include the trustee's salary (which includes a flat fee plus a percentage of the assets), and other common accounting expenses.

Unsecured Debts: This category may include high-priority debts such as child support back payments owed by the filer and more. In most cases, debts in this category cannot be discharged. You must pay child support, spousal support (in most cases), and student loan debts (usually).

General Debts: Here you have the bulk of what most consumers are burdened with. Credit card and medical debt, payday loan debt, personal loans, and more make up these debts. Most people don't have enough assets to pay any of this category and they are often discharged in full.

In general, the debt priority system won't affect filers except when a debt cannot be discharged. To learn more, contact a bankruptcy attorney.