The totem pole in Bankruptcy. Who gets paid first?

Chapter 7 bankruptcies have a hierarchy of creditor claims that is the result of the legislative process.  The totem pole was carved with an attempt at fairness and common sense, but naturally has politics painted on it.  This hierarchy described below  is mostly self-explanatory.  As a creditor, if you don’t understand the description, it likely does not apply to you.

Creditors with priority debts get paid first, in this order, based on the Bankruptcy Code:

  • Domestic support obligations (child support and spousal support or alimony)

  • Chapter 7 Trustee’s administrative fees and charges assessed against the estate

  • Other administrative expenses related to the estate like Chapter 7 Trustee attorneys fees

  • Unsecured claims by any Federal reserve bank related to loans through programs or facilities authorized under the Federal Reserve Act

  • Unsecured claims such as taxes assessed against the property of the estate, attorney fees, rent reserved by a lease, employee’s claim for damages resulting from termination of an employment contract and compensation owed

  • Unsecured claims up to $10,000 for each individual or corporation for wages, salaries or commissions including vacation, severance and sick leave pay, and independent contractor’s sales commissions

  • Employee benefits plans

  • Pensions for farm workers involved in grain production and fishermen

  • Return of money deposited for purchase, lease or property rental

  • Tax debt owed on income tax returns up to three years before filing for bankruptcy

  • Property tax incurred within one year of filing for bankruptcy when no penalty was owed at that time

  • Employment taxes on wages, salaries or commissions

  • Certain excise taxes

  • Unsecured claims based on debtor’s commitment to a Federal depository institution’s regulatory agency

  • Death or personal injury claims resulting from driving under the influence

  • Secured property liens such as mortgage or car loans. (Bankruptcy discharges the personal liability for the debt, but debtors still must make payments after bankruptcy because the creditor still holds an enforceable lien on the property.)

  • Erroneous government refunds or tax credits

Whatever unsecured claims that remain have last priority for payment, such as credit card debt, medical bills, utility bills and unsecured loans.  This is why, common creditors, most often are faced, if they get anything at all, with pennies on the dollar.  The vast majority of Chapter 7 filings are no-asset cases that are closed out.  A portion of the $335 filing fee goes to the Chapter 7 Trustee as compensation for reviewing the case and conducting the meeting of creditors.

Topics:  Chapter 7, Consumer Bankruptcy, Creditors, Secured Creditors, Unsecured Creditors

Published In: Bankruptcy Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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