In the last post we talked about secured and unsecured creditors.  Priority creditors are a third type, although they are either secured or unsecured as well.  The word priority means that these creditors have priority in payments under the Bankruptcy Code.  Section 507 of the Bankruptcy Code sets out the order in which claims are to be paid.  Priority claims appear on a separate schedule in the bankruptcy, Schedule E, Creditors Entitled to Priority.  The most common priority claims for consumer debtors are taxes and domestic support obligations, such as child support and alimony.

In addition to receiving priority in payment if a distribution is made by the trustee, most priority claims are also nondischargeable, meaning they can’t be discharged in bankruptcy.  Domestic support obligations fall into this category; they are nondischargeable.  So are most taxes.  The only taxes that can be discharged are personal income taxes and then only if certain conditions are met.  These are:

1. For which a return is last due, including extensions, more than three years prior to filing bankruptcy.  Since returns are due on April 15 of the following year, assuming no extension was taken, taxes for the year 2012 would not be potentially dischargeable until 2016.
2. Which were assessed at least 240 days prior to filing bankruptcy.  Assessment is generally when the return is filed; however, if the return is challenged, it may be a later date than filing.  You should speak with a tax professional if you have concerns over this requirement; and
3. For which a return was filed at least two years prior to filing bankruptcy.

Other claims that are priority and must be scheduled on Schedule E include wages owed to individuals for the 180 days prior to filing; certain claims arising in involuntary bankruptcies; and certain claims against operators of grain storage facilities.