While you may know that bankruptcy can help eliminate debt, did you know that there are different rules on which debts must be paid first? This is due to the fact that some debts are considered a priority. As such, it’s critical to understand why debts are prioritized and which ones will be paid first, as this can help you gain a better understanding of what outcomes you can expect if you make the decision to file for bankruptcy. The following blog and a Memphis, TN consumer bankruptcy lawyer can help you explore your legal options during this intense process.
What Does It Mean if a Debt is Prioritized and Why Does It Matter?
When you file for bankruptcy, it’s important to understand that all creditors must be on the same level. This means you cannot make payments to certain creditors before filing, as this would reduce the ability of other creditors to recover compensation. However, within bankruptcy itself, certain debts are prioritized over others.
Generally, a priority debt is considered a “serious” debt that has impending consequences if left unpaid. For example, any rent arrears are considered a priority debt, because failure to make payments can result in eviction. This also applies to outstanding child support, as not only do these funds benefit your children, but you can face legal consequences if these are left unpaid. As such, these debts are paid first from your bankruptcy estate, and often must be paid in full before other creditors can receive payments.
Next, secured debts in your name will be paid, as these have collateral attached to them. This includes things like your mortgage, as the bank can seize your home if you fall behind on payments, or your car, as the lender may repossess the vehicle.
Finally, your unsecured debts are the lowest priority. These are debts like personal loans or credit card bills that do not have any collateral attached. In many instances, your unsecured debts can be discharged at the conclusion of your bankruptcy case, meaning you no longer have a legal obligation to repay them.
What Should I Do Before Filing?
If you are planning to file for bankruptcy, as mentioned, you should avoid making any payments to creditors. While this may seem beneficial, it can actually be considered a preferential payment, as it gives a creditor, often a friend or family member to whom you owe a personal loan, an unfair advantage. As such, the court can actually “claw back” these payments to include them as part of your bankruptcy estate and keep all creditors on even footing.
Next, prior to filing for bankruptcy, you should begin gathering documentation of all of your assets and liabilities. This includes any formal information from creditors about your loans, debt validation notices from debt collectors, and tax returns from the prior years. You should also compile your bank statements and recent pay stubs to verify your income. These documents are critical to ensure that priority debts are easily identified to prevent issues with your case.
As you can see, bankruptcy can be an incredibly overwhelming and complicated process to navigate. Unfortunately, some errors may not only delay your case or provide unfavorable outcomes, but in some instances, mistakes can result in the dismissal of your case without any relief. That is why working with an experienced attorney is critical to fighting for the best possible outcome for your unique circumstances.
At the Arnold Law Firm, our team is committed to helping you through these matters so you can fight for the best possible outcome. When you need help, do not hesitate to contact our firm today.
