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Prioritizing Debts During Chapter 7 Bankruptcy

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In 2014, the aggregate household debt of Americans was $11.71 trillion with the average household carrying $6,500 in credit card debts. With debts continuing to rise, many Americans are seeking alternative options available to them financially in order to achieve financial freedom. In 2014, there were a total of 619,069 chapter 7 bankruptcy filings. Chapter 7 bankruptcy is perhaps the easiest option. Under chapter 7, applicants can receive a clean financial slate if they are to surrender all of their assets to be paid to debtors. This article will familiarize you with the 6 classes of claims that are available; each class must be paid in full before the next class will see even a single penny.  

Separating All Debts Into The 6 Classes

First and foremost, a bankruptcy trustee will need to sit down with you in order to determine the exact amount of debt that you have accrued over the years, and which class each debt falls under. The trustee is responsible for taking all of your nonexempt assets and liquefying them. Once all of the assets have been sold, the trustee will then begin the process of distributing funding to the appropriate classes. There are 6 classes, and they include:

  • priority claims. These claims are paid out first before anything, and will include administrative fees, wages and commissions of the debtor's employees, child support, taxes, and fees that may be charged against the estate. This category may also include secured debts, which involve debts that are connected with a physical asset.
  • unsecured and allowed claims. Unsecured creditors are also allowed to submit a claim against the debts that you owe them providing that they have proof of claim. All unsecured and allowed claims will be paid out next.
  • late unsecured claims. Any creditors who are late in submitting their claims will be paid out next. When you file for bankruptcy, your trustee will send out a notice to everyone that you are indebted to with a firm deadline that must be met.
  • fines and penalties that may have accrued over the years. If you have accrued any penalties and fines or forfeiture claims, they will be paid out next. These fines and penalties must have been accrued before the date that the chapter 7 bankruptcy application was filed.
  • interest charges. If there is any money or funding left over, your bankruptcy trustee will be responsible for calculating what the interest charges are on the claims that you were owing and on claims that were paid out already. 
  • debtor. Once everything has been paid out, any of the money from the sales of assets that is remaining will be distributed back to the debtor.

Discharge Of Debt Based On The Above Classes

Depending on the amount of assets that you have, not all 6 classes may be paid in full. Some creditors may not be eligible for receiving the entire amount that they are owed. Your bankruptcy trustee will be responsible for negotiating reasonable terms and conditions that will satisfy the creditors. Once the bankruptcy application has been approved with all of the agreed terms and conditions for each creditor listed, and all of your assets have been distributed accordingly, then you will receive a discharge of debt.

Once you have received a discharge of debt, you are released for all future obligations to repay any remaining debt to creditors. Since chapter 7 bankruptcy allows for many exceptions, your bankruptcy trustee will want to spend some time discussing what terms and conditions are reasonable and which creditors have priority to getting paid.


Dealing with chapter 7 bankruptcy can be rather time-consuming; however, for those who are suffocating in debt, it may be the best option available to finally start clean once again. Keep in mind that applicants will need to surrender all of their non-exempt assets. In addition, the record of filing for bankruptcy will stay on the applicant's credit score for up to 10 years from the date that the bankruptcy was filed, and the applicants cannot file for bankruptcy protection for another 8 years.

For more information, consult a chapter 7 bankruptcy attorney.