Legal Definitions - priority debt

In legal and financial contexts, priority debt refers to specific types of financial obligations that are legally required to be paid before other debts, especially when a person or entity has insufficient funds to pay all their creditors. These debts are given precedence due to their nature, often reflecting important social policies or the necessity of covering administrative costs in situations like bankruptcy or the settlement of an estate.

When an individual or a business files for bankruptcy, or when an estate is being settled after someone's passing, the available assets are distributed according to a strict hierarchy. Priority debts sit at the top of this hierarchy, meaning they must be satisfied first, either in full or to the maximum extent possible, before any funds can be allocated to non-priority or "general unsecured" debts, such as credit card balances or most personal loans.

• Individual Bankruptcy and Support Payments: Imagine a situation where an individual files for Chapter 7 bankruptcy. They have accumulated significant credit card debt, a car loan, and also owe several months of child support to their former spouse. When their assets are liquidated, the funds will first be used to pay the administrative costs of the bankruptcy case itself, and then the outstanding child support payments. Only after these priority debts are addressed will any remaining funds be distributed to other creditors, like the credit card companies or the car loan lender. This illustrates how child support is legally prioritized to ensure dependents receive necessary financial assistance.
• Estate Administration and Final Expenses: Consider a scenario where an elderly person passes away, leaving behind a modest estate. They have outstanding medical bills from their final illness, funeral expenses, and a few small personal loans from friends. Before any of the estate's assets can be distributed to heirs or used to repay the personal loans, the executor of the estate is legally obligated to pay the funeral expenses and the medical costs associated with the last illness. These are typically considered priority debts in estate administration, ensuring that essential final arrangements and care are covered first.
• Business Bankruptcy and Employee Wages: A small manufacturing company faces severe financial difficulties and files for Chapter 11 bankruptcy. The company owes its employees two weeks of unpaid wages, has a large bank loan, and outstanding invoices from various suppliers. During the bankruptcy proceedings, a certain amount of the unpaid wages owed to employees is designated as a priority debt. This means that, up to a statutory limit, the employees' claims for their wages will be paid from the company's remaining assets before the bank or the general suppliers receive any funds. This prioritization helps protect employees who depend on their earnings.