Bankruptcy Priority Claims

Bankruptcy does two things: give a debtor a fresh start, while providing the maximum possible payment to creditors. In most bankruptcies, the debtor’s creditors, as a group or whole, will receive dimes or pennies on the dollar for their claims. (After all, if the debtor had enough to pay them in full, he wouldn’t need to file bankruptcy.) However, that is not to say that each creditor will receive the same proportion or percentage—some creditors will receive more than others.

Secured vs Unsecured Debt

The biggest distinction is between secured and unsecured creditors. A secured claim has some asset or property acting as collateral: e.g. a mortgage or car loan, where the creditor can foreclose or repossess. The secured creditor can recover the collateral to make sure they are paid (at least up to the value of the collateral). All other claims are unsecured claims, and they do not stand in as good a position as secured claims.

Priorities Amoung Unsecured Debt

Even among unsecured claims, some claims are treated better than others. The bankruptcy code considers certain debts to be priority claims; all priority claims must be paid in full before any nonpriority claims are paid. Even among priority claims, not all claims are created equal: the law establishes 10 classes or categories of priority claims, ranked by priority. All claims of a higher priority must be paid in full before any claims of a lesser priority are paid at all.

10 Priority Claims

In order, with 1 being the highest priority and 10 being the lowest, the priority claims are:

1. Domestic support obligations, such as alimony or child support
2. Administrative expenses of the bankruptcy case
3. Debts incurred after an involuntary petition but before bankruptcy has been declared; when creditors try to force a debtor into bankruptcy by filing an involuntary petition, the courts give priority to entered into after the petition is filed in order to encourage suppliers, contractors, and creditors to keep doing business with the debtor
4. Employee wages, up to $10,950 per employee
5. Unpaid contributions to employee benefit plans, with some limitations
6. Claims for grain from a grain producer or fish from a fisherman, which keeps the cast of Deadliest Catch happy
7. Consumer layaway deposits of up to $2,425 each
8. Taxes incurred prior to the bankruptcy petition
9. Commitments to Federal depository institutions to maintain the institution’s capital
10. Claims for death or personal injury from DUI/DWI

As you can imagine, after secured creditors have taken their collateral and priority claims have been paid off, there’s not a lot left for other unsecured creditors, such as credit card issuers or most independent contractors or suppliers.

How Bankruptcy Attorneys Can Help

If you are a creditor of a debtor who has already declared bankruptcy, there is little an attorney can do, other than make sure you are characterizing your claim the right way—describing and presenting it so that it has the highest priority possible. However, if there are signs that someone you may be doing business with is in financial distress, an attorney can help you structure sales, loans, or provisions of services in a way that maximizes your likelihood of being paid, such as by securing any debts.