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What creditor do I pay first in a Chapter 7 bankruptcy?

On Behalf of | Oct 13, 2021 | Chapter 7 Bankruptcy

Filing for bankruptcy could result in a tremendous financial burden lifted off someone’s mind. After passing the means test to file for Chapter 7, a filer may discover a significant amount of debt ends up discharged. Not all debt goes away without any payments, though. Some creditors could receive payments, and the filer may wonder who gets paid first.

Settling with creditors during Chapter 7 bankruptcy

One benefit to Chapter 7 bankruptcy centers on the discharge element. “Discharged” debt refers to debt that gets wiped out. Once the courts discharge debt, the creditor loses all claims to it. However, the process is referred to as “liquidation bankruptcy” for a reason. Some assets are liquidated to pay specific creditors.

Not all debt is the same, and federal bankruptcy law may refer to obligations as priority unsecured debt or nonpriority unsecured debt. There is also secured debt, which involves collateral. A car loan could be a form of secured debt while medical debt is unsecured.

The first payments associated with Chapter 7

Regarding questions about who receives the first payments during Chapter 7 bankruptcy, priority unsecured debt comes first. Taxes are one example of unsecured debt that gets a “priority” ranking. Criminal fines and civil judgments could be other priority secured debts.

Secured debt, such as a loan backed by jewelry or a motor vehicle, follows priority unsecured debt. Unsecured nonpriority debts, including credit card obligations, follow secured debt. When it is both nonpriority and unsecured, the debt may end up discharged.

A bankruptcy filer may wonder how to make payments or who to pay first from a list of priority obligations. Keep in mind that bankruptcy is a legal process that occurs in federal court. The filer would likely receive guidance or directives on how to handle things. An attorney may provide further assistance during the proceedings.