11 U.S.C. Section 507 -- Priority Claims in Bankruptcy

What Is Section 507?

Section 507 of Title 11 of the United States Code (Priorities) is a foundational provision of the Bankruptcy Code. It establishes the priority order in which unsecured claims are paid in bankruptcy. Priority claims must be paid before general unsecured claims. Understanding priorities is essential for both debtors and creditors.

Key Provisions of Section 507

Section 507(a) establishes the following priority order:

1. 507(a)(1) -- Domestic Support Obligations: Child support and alimony (DSOs) have the highest priority. They must be paid in full in Chapter 13 plans.
2. 507(a)(2) -- Administrative Expenses: Costs of preserving and administering the estate, including trustee fees, attorney fees for the estate's lawyer, and costs of operating the debtor's business during the case.
3. 507(a)(3) -- Gap Claims: Claims arising in involuntary cases between the filing date and the order for relief.
4. 507(a)(4) -- Employee Wages: Wages, salaries, and commissions earned within 180 days before filing, up to $15,150 per employee.
5. 507(a)(5) -- Employee Benefit Plans: Contributions to employee benefit plans for services rendered within 180 days before filing.
6. 507(a)(7) -- Deposits: Consumer deposits for undelivered goods or services, up to $3,350 per individual.
7. 507(a)(8) -- Tax Claims: Income taxes, employment taxes, property taxes, and other tax debts meeting specific timing requirements. Income taxes for returns due within 3 years of filing get priority status.

How This Affects You

How priorities affect your bankruptcy:

• Chapter 7 liquidation: The trustee distributes estate funds in priority order. Higher-priority claims are paid in full before lower-priority claims receive anything. General unsecured claims are paid last.
• Chapter 13 plans: Your plan must pay all priority claims in full. This means past-due child support, recent taxes, and other priority debts cannot be reduced -- they must be paid 100% through the plan.
• Tax planning: Whether a tax debt has priority status determines whether it must be paid in full or can be discharged. The timing rules (3-year rule, 2-year rule, 240-day rule) determine priority for income taxes.
• Employee claims: If you are a business owner filing bankruptcy, your employees' unpaid wages get priority up to $15,150 each, ahead of your general creditors.

Related Bankruptcy Code Sections

Section 507 works in conjunction with several other provisions of the Bankruptcy Code:

• Section 1325 -- Chapter 13 must pay priority claims in full
• Section 523 -- Nondischargeable debts (overlap with priority taxes)
• Section 329 -- Attorney fee review (administrative expense)

Understanding how these sections interact is critical for anyone navigating the bankruptcy process, whether as a debtor, creditor, or attorney.