What’s Your Priority?

By: Gene Sollows Gene Sollows

One of the concepts of bankruptcy that is somewhat elusive to most clients is the concept of a “priority” debt. This term has different meanings to debtors depending on whether they are in a bankruptcy proceeding.

Outside of a bankruptcy, “priority” is subjective during times of financial difficulty. In such times, we are forced to make difficult choices — paying some debts at the expense of others. Perhaps your home mortgage is your personal priority and making sure that it is paid takes precedence over all other debts so that your home is not foreclosed upon. Others may put their car creditors first to keep the repossession agent at bay so that their transportation is secure. Or maybe a creditor is getting preferential treatment because of its behavior toward you and out of emotion (frustration, fear, shame, a sense of obligation, etc.) you resolve to pay that particular creditor first. Simply keeping electric, water and telephone service can be a real concern in times of trouble.

As the number and amount of creditors increase and financial trouble worsens, prioritizing your debts becomes increasingly challenging. You may be in a situation in which you have to “rob Peter to pay Paul.” Admitting that you can’t continue in your present situation is the first step to resolving the problem.

In bankruptcy, within their classifications, all creditors are treated the same. Creditors are not rewarded in bankruptcy for aggressive or outrageous behavior — they get in line with everyone else.

There are generally three classifications, or “priorities,” of debt in bankruptcy: secured, priority and unsecured.

Secured debts have an item of property as collateral for the debt, typically real property, vehicles and other items of personal property. In bankruptcy, you may either pay secured creditors or surrender the collateral to the creditor, treating any remaining debt as unsecured.

Priority debts are unsecured but entitled to payment due to their special status. These debts cannot generally be eliminated in bankruptcy and must be paid. Most income tax debts and child support obligations are priority debts.

Unsecured debts consist of all debts that are not secured or priority debts. Typically, such debts include credit card debt, medical bills and other miscellaneous items on your credit report. These debts have the lowest priority in bankruptcy and are only paid to the extent you can afford to pay them. In the vast majority of cases, unsecured debt that you cannot pay is discharged — forever eliminated in bankruptcy.

If you’re having a hard time prioritizing your obligations, bankruptcy can be a powerful way to responsibly get your debts under control while keeping creditors off your back. At Bailey & Galyen, we are committed to helping you get a fresh start and restoring financial peace to your life.

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