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Priority Debts in a No-Asset Chapter 7 Case

November 25th, 2019 at 8:00 am

Priority debts are largely unaffected by a Chapter 7 case—it does not discharge them, so you need to pay them after finishing your case.

 

Most Chapter 7 Cases Are No-Asset Cases

Chapter 7—“straight bankruptcy”—is the most common type of consumer bankruptcy case. They are generally the most straightforward, lasting about 4 months start to finish. Usually everything you own is protected by property exemptions. You discharge, or legally write off all or most of your debts. Secured debts like a home mortgage or vehicle loan are either retained or discharged. You either keep the collateral and pay for it, or surrender it and discharge any remaining debt. Bankruptcy does not discharge certain special debts like child/spousal support and recent income taxes.

A “no-asset” Chapter 7 case is one, as described above, in which everything you own is covered by property exemptions. So you keep everything you own (with the exception of collateral you decide to surrender). It’s called a no-asset case because your Chapter 7 trustee does not get any assets to liquidate and distribute to any of your creditors. The trustee just verifies that you have no unprotected assets. He or she does this mostly by reviewing your bankruptcy documents and asking you some simple questions at your hearing. A large majority of Chapter 7 cases are no-asset ones. Your bankruptcy lawyer will tell you if yours is expected to be.

Although Chapter 7 is theoretically a liquidation form of bankruptcy, in a no-asset case there is nothing to liquidate. You lose no assets, and you lose all or most of your debts.

What Happens to Your Special, Priority Debts in a No-Asset Chapter 7 Case?

Yes, what about debts that do not qualify for discharge? There are various types of such debts, although most cases have either only one or two not-discharged debts, or none at all.

Most debts that Chapter 7 does not discharge are what are called priority debts. These are simply categories of debts that Congress has decided should be treated with higher priority than other debts. In consumer cases the most common priority debts are child/spousal support and recent income taxes. See the U.S. Bankruptcy Code subsections 507(a)(1) and (8). (Not to go into the rules here, but many older income taxes are not a priority debt and can be discharged.)

Priority debts generally get paid ahead of other debts in bankruptcy. This is true in an asset Chapter 7 case—where the trustee is liquidating a debtor’s assets.  In fact the trustee must pay a priority debt in full before paying regular (“general unsecured”) debts a penny!

But in a no-asset Chapter 7 case the trustee has no assets to liquidate. So he or she cannot pay any creditors anything, including any priority debts. So, essentially nothing happens to a not-dischargeable priority debt in a no-asset Chapter 7 case.

Dealing with Priority Debts During and After a Chapter 7 Case

However, one benefit you receive with some priority debts is the “automatic stay.” This stops (“stays”) the collection of debts immediately when you file a bankruptcy case. This “stay” generally lasts the approximately 4 months that a no-asset case is usually open. This no-collection period gives you time to make arrangements to pay a debt that is not going to get discharged. So you can start making payments either towards the end of your case or as soon as it’s closed. The hope is that you’ve discharged all or most of your other debts so that you can now afford to pay the not-discharged one(s).

The automatic stay applies to most debts, but there are exceptions. Child/spousal support is a major exception. Filing a Chapter 7 case does not stop the collection of support, either unpaid prior support or monthly ongoing support. (Note that Chapter 13 “adjustment of debts” can stop the collection of unpaid prior support under most circumstances.)

So, with nondischargeable priority debts that the automatic stay applies to, during your case you and/or your bankruptcy lawyer make arrangements to begin paying the debt. With ones that the automatic stay does not apply to, you need to be prepared to deal with immediately.

If neither of these make sense in your situation, consider filing a Chapter 13 case instead. Talk with your bankruptcy lawyer about the advantages and disadvantages of each option. Chapter 13 takes a lot longer—from 3 to 5 years usually. But if you have a lot of priority debt (or secured or any other nondischarged debts), it can really help.

 

Written by Staff Writer

November 25th, 2019 at 8:00 am

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