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Priority Of Payment
LAWDOG is intended to assist in the understanding of basic concepts. See Disclaimer. Always obtain legal advice from legal professionals.
Distribution of Property In Chapter 7 To Holders of "Allowed" Claims
An important concept involves the priority of payment for creditors holding a claim in a Chapter 7 liquidation. The rules concerning distribution of property of the estate are important where, as in most Chapter 7 cases, the proceeds from liquidation of the estate by the case Trustee will probably be less than required to pay all creditors in full.
Unsecured Claim
"Priority" Claims
FIRST: Claims in the priority as set forth in Section 507(a) of the Bankruptcy Code.
These include "administrative expenses"of the bankruptcy, fees and charges assessed against the estate, unsecured claims in an involuntary case which arise after filing but before appointment of a trustee, or 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.
Also included in these "Priority Claims" are certain contributions to an employee benefit plan, and unsecured claims of grain farmers and United States fisherman to the extent of $4,000 for each claimant. These "Priority Claims" also include unsecured consumer "layaway" 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.
Other "Priority Claims" are certain spousal and child support, certain unsecured tax claims prior to the date of filing bankruptcy, and unsecured claims based on commitments made by a debtor to maintain the capital of an insured Federal depository institution. See Section 507 (a) of the Bankruptcy Code, reproduced here for illustration purposes only.
General Unsecured Allowed Claims
SECOND: General Unsecured Allowed Claims.
After all of the "Priority Claims" are paid in full, other unsecured creditors, which have filed a Proof of Claim on an "allowed" claim are paid. This category excludes claims 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. See Section 726 (a) (2) of the Bankruptcy Code, reproduced here for illustration purposes only.
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.
Creditors 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. See Section 726 of the Bankruptcy Code, reproduced here for illustration purposes only.
