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.

Photo of Ross Kilburn
By Ross Kilburn · Founder, American Default Research
Updated
See the 7 sources

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:

  1. Domestic support obligations (§ 507(a)(1)): Child support and alimony — the highest priority. Generally paid before other unsecured claims if owed to a spouse, former spouse, or child, except that certain costs of the trustee’s work are paid first when that work involves assets otherwise available to pay these support claims.
  2. 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
  3. Involuntary gap claims (§ 507(a)(3)): Claims arising in the ordinary course of business or financial affairs after an involuntary petition and before the earlier of appointment of a trustee and the order for relief.
  4. Employee wages (§ 507(a)(4)): Wages, salaries, and commissions earned within 180 days before filing, up to $17,150 per employee
  5. Employee benefit plan contributions (§ 507(a)(5)): Unpaid contributions for services provided within 180 days before filing or before the business stopped operating, whichever happened first, capped for each plan at the number of covered employees × $17,150 minus both priority wages paid to those employees and amounts the estate paid for them to other employee benefit plans.
  6. Grain farmer and fisherman claims (§ 507(a)(6)): Claims by grain producers or fishermen against storage facility or fish processing operators, up to $8,450
  7. Consumer deposits (§ 507(a)(7)): Deposits paid by consumers for goods or services never delivered, up to $3,800 per individual
  8. Tax claims (§ 507(a)(8)): Income taxes for returns due, including extensions, within 3 years before filing; property taxes incurred before filing whose last day to pay without penalty falls after the date one year before filing; and 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:

  • Allowed priority tax claims generally in full, although interest can keep accruing on unsecured tax debts that can't be discharged.
  • 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: Income taxes for returns due within 3 years before filing, taxes assessed within 240 days before filing, and trust fund taxes (employer withholding). Taxes for unfiled returns are nondischargeable but aren't priority solely because no return was filed.
  • 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.

Questions about priority debt

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 generally must be paid in full through the plan unless a statutory exception applies or the creditor agrees to different treatment, but unpaid domestic support and certain priority taxes remain owed after discharge.

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 aren't paid from the estate survive the discharge only if an applicable discharge exception covers them.

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?

The usual timing requirements for possible income-tax discharge are a return due more than 3 years before filing, a qualifying return filed more than 2 years before filing, and a tax assessment more than 240 days before filing. These periods allow for extensions and any pauses. Failing any required discharge condition can leave the tax nondischargeable. Priority can arise from either the recent return-due test or the recent assessment test. Consult a bankruptcy attorney for precise calculations.

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 or taxes assessed within 240 days before filing, with these time periods sometimes extended, and property taxes incurred before filing whose last day to pay without penalty falls after the date one year before filing. Older income taxes may be dischargeable if other requirements are met.
  • In Chapter 13, repayment plans usually last three to five years. The plan must pay priority debts in full, subject to exceptions for creditor agreement and certain domestic support claims.
  • Employee wage claims receive priority up to $17,150 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.

Related data

Sources and method

We write with assistance from AI tools. Figures come from the data and sources named on this page.