What Is Priority Debt?
Priority debts are obligations that the Bankruptcy Code designates for preferential treatment — they must be paid in full before general unsecured creditors receive anything. The most common priority debts are recent tax obligations, domestic support obligations like child support and alimony, and certain employee wages. Priority debts generally cannot be discharged in Chapter 7 and must be paid in full through a Chapter 13 plan.
Key Facts
- Section 507 of the Bankruptcy Code establishes 10 categories of priority claims, ranked in order — domestic support obligations (child support and alimony) receive the highest priority among unsecured claims
- Priority tax debts include income taxes from returns due within 3 years before filing, assessed within 240 days, and property taxes assessed within 1 year — older tax debts may be dischargeable as general unsecured claims
- In Chapter 13, the repayment plan must pay all priority debts in full over the plan term (3-5 years) — this requirement can significantly increase monthly plan payments
- Employee wage claims receive priority up to $15,150 per employee for wages earned within 180 days before the bankruptcy filing — this protects workers when their employer files Chapter 11 or Chapter 7
- Priority debts are distinct from secured debts — secured debts are backed by collateral, while priority debts receive preferential treatment based solely on their statutory classification
Live Data
What Are the Categories of Priority Debt?
Section 507(a) of the Bankruptcy Code lists priority claims in rank order. The most relevant for consumers and small businesses:
- Domestic support obligations (§ 507(a)(1)): Child support and alimony — the highest priority. Must be paid before all other unsecured claims, including administrative expenses if owed to a spouse, former spouse, or child
- Administrative expenses (§ 507(a)(2)): Costs of administering the bankruptcy case — trustee compensation, attorney fees for the estate, and post-petition business expenses in Chapter 11
- Involuntary gap claims (§ 507(a)(3)): Claims arising in the ordinary course of business between an involuntary petition and the order for relief
- Employee wages (§ 507(a)(4)): Wages, salaries, and commissions earned within 180 days before filing, up to $15,150 per employee
- Employee benefit plan contributions (§ 507(a)(5)): Unpaid contributions to employee benefit plans, limited to the number of employees × $15,150 minus any priority wages already paid
- Grain farmer and fisherman claims (§ 507(a)(6)): Claims by grain producers or fishermen against storage facility or fish processing operators, up to $15,150
- Consumer deposits (§ 507(a)(7)): Deposits paid by consumers for goods or services never delivered, up to $3,350 per individual
- Tax claims (§ 507(a)(8)): Income taxes for returns due within 3 years, property taxes assessed within 1 year, trust fund taxes (employment taxes withheld from employees)
How Do Priority Debts Affect Chapter 13 Plans?
In Chapter 13, priority debts create a floor for plan payments. The plan must pay:
- All priority tax debts in full (though interest stops accruing)
- All domestic support arrears in full
- All other priority claims in full
These requirements are in addition to mortgage arrears (which must be cured) and secured debt payments. A debtor with $30,000 in priority tax debt on a 60-month plan would need to pay at least $500/month just for the tax priority — before any other plan payments. This is why large tax debts often make Chapter 13 infeasible.
Which Taxes Are Priority vs. Dischargeable?
The distinction between priority and dischargeable tax debt is one of the most complex areas of consumer bankruptcy:
- Priority (not dischargeable): Income taxes for returns due within 3 years of filing, taxes assessed within 240 days of filing, trust fund taxes (employer withholding), and taxes for unfiled returns
- Potentially dischargeable: Income taxes more than 3 years old (by due date), assessed more than 240 days before filing, for which a return was filed more than 2 years before filing, and where no fraud or willful evasion occurred
The 3-year, 240-day, and 2-year rules must all be met for a tax debt to be dischargeable. Tax liens survive discharge and attach to pre-petition property.
Priority Debt and the American Distress Index
Rising household financial distress often correlates with growing tax delinquencies and domestic support arrears. When households fall behind on priority obligations — especially IRS debt — their bankruptcy options become more constrained. The interaction between priority debt and Chapter 13 feasibility is a key factor in whether distressed households can reorganize or are forced into Chapter 7 liquidation.
Frequently Asked Questions
Can priority debts be discharged in bankruptcy?
Most priority debts cannot be discharged in Chapter 7. Domestic support obligations are never dischargeable. Priority tax debts survive Chapter 7 discharge. In Chapter 13, priority debts must be paid in full through the plan — but they are formally discharged upon plan completion.
What happens to priority debts in Chapter 7?
In Chapter 7, priority debts are paid first from any asset distribution. If the estate has assets, secured claims are paid from collateral, then priority claims in statutory order, then general unsecured claims pro rata. Priority debts that are not paid from the estate survive the discharge.
Are student loans priority debts?
No. Student loans are general unsecured debts. They are treated specially not because of priority status but because they are excepted from discharge under § 523(a)(8) unless the debtor proves undue hardship. They are in the lowest payment tier but survive the bankruptcy.
Is my mortgage a priority debt?
No. Mortgages are secured debts, not priority debts. They are paid from the collateral (the home). If the mortgage is undersecured (you owe more than the home is worth), the deficiency becomes a general unsecured claim, not a priority claim.
How do I know if my tax debt qualifies as priority?
Apply the 3-2-240 test: the tax return was due within 3 years of filing, the return was filed at least 2 years before filing, and the tax was assessed within 240 days of filing. If any test fails, the tax may be a dischargeable general unsecured claim. Consult a bankruptcy attorney for precise calculations.