Priority

The U.S. Bankruptcy Code establishes an order in which bankruptcy claims are paid. Claims filed by creditors are paid according to the following general rules:

• Higher priority claims must be paid in full before claims with a lower priority are paid.
• Claims with the same priority are paid proportionately the same amount. For example, if a general unsecured creditor owed $1,000 were paid $50 a general unsecured creditor owed $10,000 would receive $500.
• Secured claims can be paid from the proceeds of liquidating the collateral that secured the claim. If the Court does not allow the collateral to be liquidated, pre-petition secured creditors with a perfected security interest will be offered other assurances by the debtor under the jurisdiction of the Court that they will be paid in full.

The following claims have priority over pre-petition unsecured claims:

1. Administrative expenses
2. Unsecured claims arising in the ordinary course of business after filing an involuntary petition
3. Pre petition secured claims
4. Post petition unsecured claims
5. Certain wage and salary claims
6. Certain claims related to contributions to employee benefit plans
7. Claims by individuals arising from deposits of money in connection with property or services for personal, family, and household use purchased but not delivered by the debtor
8. Claims of governmental agencies for taxes, including income tax, property tax assessments, employment taxes, excise tax, sales tax and customs duties
   

Reprinted with the permission of Credit Research Foundation.

Edited by Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore.