LAWDOG BANKRUPTCY: CHAPTER 7

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"Allowed" Claims

A claim or interest, proof of which is filed under Section 501 (Proof of Claim), is deemed allowed, unless a party in interest objects. If there is an objection, a court hearing is held, and the court determines the amount of claim as of date of bankruptcy filing. Claims are not allowed if claim is unenforceble because the debtor has a valid defense to the claim, or if the claim is for post-petition interest on an unsecured claim, or other exceptions. See Section 502 of the Bankruptcy Code, reproduced for illustration purposes only here.

Under the Bankruptcy Code, a secured claim is an allowed claim, secured by a lien on property of the debtor, or subject to a setoff. In a Chapter 7 case, a secured creditor generally receives cash equivalent to the allowed secured claim, or return of the secured property. The distribution of property to secured creditors is provided for by Section 725 of the Bankruptcy Code, reproduced for illustration purposes only here.

The secured claim is generally considered secured only to the extent of the value of the particular collateral. If the allowed secured claim of the creditor is greater than the value of the collateral, the claim may be divided into a secured claim, up to the value of the collateral, and an unsecured claim for the balance. See Section 506 of the Bankruptcy Code, reproduced for illustration purposes only here.

The distribution of property to unsecured creditors is governed by Section 726 of the Bankruptcy Code. Section 726 lists six classes of unsecured claims, and each class must be paid in full before the next lower class is paid anything. These classes are:

FIRST: Claims in the priority as set forth in Section 507(a) of the Bankruptcy Code. They are:

(1) administrative expenses and any fees and charges assessed against the estate;

(2) unsecured claims in an involuntary case which arise in the ordinary course of the debtor's business or financial affairs after the commencement of the case but before the appointment of a trustee and order for relief. These are sometimes referred to as involuntary "gap" claims.

(3) wages or commissions of employees of the debtor that are earned within 90 days before the date of a bankruptcy filing or the date of cessation of the debtor's business, whichever occurs first, to the extent of $4,000 for each individual or corporation

(4)certain contributions to an employee benefit plan which arise from services rendered within 180 days before the date of a bankruptcy filing or the date of cessation of the debtor's business, whichever occurs first.

(5) unsecured claims of grain farmers and United States fisherman to the extent of $4,000 for each claimaint;

(6) unsecured consumer claims, to the extent of $1,800 for each individual,arising from the deposit, before the commencement of the bankruptcy case, of money in connection with the purchase, lease, or rental of property or services for personal, family or household property, that were not delivered.

(7) cetain spousal and child support;

(8) unsecured claims by governmental units such as income or gross receipts tax, property tax, trust fund tax, employment tax, excise tax, customs duties, and certain penalties relating to those taxes

(9) unsecured claims based on commitment made by a debtor to a Federal depository institutions regulatory agency to maintain the capital of an insured depository institution.

SECOND: Other claims except for those claims that are filed late or tardy, claims, or fines, penalty or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the date of the bankruptcy filing or the appointment of a trustee, to the extent that they are not compensation for actual pecuniary loss suffered by claimant.

THIRD: Allowed unsecured tardy or late claims.

FOURTH: Allowed secured or unsecured claims for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the date of the bankruptcy filing or the appointment of a trustee, to the extent that such claims are not compensation for actual pecuniary loss suffered by the claimant.

FIFTH: Interest at the legal rate from the date of the filing of the petition on any allowed claims paid.

SIXTH: To the Debtor.

Companies which sell goods and services on open book account are often "general" unsecured creditors. If funds are available, a general unsecured creditor may be paid following payment of priority claims discussed above. Claims which are within any classification of priority under Section 507, or classification of distribution under Section 726, must share pro-rata in any distribution to that category of claims. See Section 726 of the Bankruptcy Code, reproduced for illustration purposes only here.

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