Most bankruptcy estates have relatively few, if any, assets. However, in those cases where the bankruptcy estate does have assets to distribute to creditors, the debtor does not get to chose who does and does not get paid. This article provides a brief overview of who gets paid and in what priority.
A secured debt is one in which the creditor has a lien on the debtor's property (mortgage on a home, security interest in some collateral such as a car). The lien gives the creditor special rights to that property if the debt remains unpaid. Secured creditors claims are paid from the proceeds of liquidating the collateral securing the debt. If the collateral is insufficient to pay the debt in full, the claim may be divided into a secured claim up to the value of collateral, and an unsecured claim for the balance.
Unsecured Priority Claims
Some unsecured claims are "Priority Claims" which must be paid in full before any other unsecured claims. All claims with a higher priority must be paid in full before claims with a lower priority. All claims with the same priority share pro rata. Priority refers to the order in which unsecured claims in a bankruptcy case are paid. Under Bankruptcy Code 507(a), the order of payment is as follows:
- Administrative Cost Claims are paid first. Administrative claims include all debts incurred by the debtor with court approval after the bankruptcy filing such as: court costs, lawyers' fees, accountants' fees, trustees' expenses, etc.
- Unsecured Post Petition Claims are paid second in an involuntary bankruptcy case. These include claims that arise in the ordinary course of the debtor's business after bankruptcy has been filed.
- Employee Wage Claims that accrued within 90 days of the bankruptcy filing date, or the debtor’s cessation of business (up to $4300 per claim) are paid third.
- Contributions to Employee Benefit Plans that arise from services rendered within 180 days before of the bankruptcy filing, or the debtor’s cessation of business (up to $4300 per claim) are paid forth.
- Unsecured Farmer and Fishermen Claims, if any, are paid next.
- Unsecured Lay-away Claims are paid sixth (up tp $1800) if a deposit was made on an item not yet received.
- Court Ordered Child and Spousal Support Claims are paid seventh.
- Unsecured Recent Tax Claims (income, sales, excise, property, employment, custom duties) are paid eighth.
General Unsecured Claims
Once all of the above Priority Claims have been paid, the remaining unsecured creditors will share pro-rata.
Interest, at the legal rate, from the date the bankruptcy petition is filed on any allowed claims are paid last. Anything left over will go to the debtor.