Defining Bankruptcy Classes of Claims

When a business or an individual files for bankruptcy, the creditors are divided into a variety of bankruptcy classes. Their claims are paid according to how they are prioritized. In a Chapter 7 liquidation bankruptcy, the trustee assigned to handle the case can liquidate any non-exempt assets that the debtor has. Anyone that owns a home can claim one homestead exemption, but any other property free of liens can be sold to pay back their creditors.

Which Chapter Best Fits Your Circumstances?

A Chapter 7 bankruptcy allows an individual, partnership or corporation to discharge nearly all of their unsecured debts. If the business owner wants to reorganize their debts, they can choose to file under Chapter 11 or Chapter 13. Only an individual can file for Chapter 13 for any business-related debts that they are personally responsible for.

Most large companies who wish to reorganize their debts file under Chapter 11. The business owner is known as a “debtor in possession” and retains control of the company. If there is any evidence of fraud or mismanagement, the court may appoint a trustee to operate the business upon the request of the creditors. The first step is to come up with a plan outlining how they plan to repay the creditors. A creditors committee is formed and their primary responsibility is to protect the rights of all of the unsecured creditors. Any expenses that the committee incurs will be paid as an administrative claim.

Prioritizing Debts in Bankruptcy

Bankruptcy law requires each creditor to be placed into a different class, based upon their financial interest and legal status. There are a total of six different classes and each class can vote in favor of the plan or against it. Before the plan can be approved by the bankruptcy court, a majority of the creditors must be in agreement regarding the terms of repayment. Classes are usually divided by:

• Whether their financial claim is secured by collateral or if they are an unsecured creditor
• Whether the debt is likely to be contested
• The financial interests of each claimant, such as a vendor, shareholder or employee

The federal bankruptcy laws require any secured creditor to have their collateral returned or be given the equivalent cash value. Employees are granted a priority claim up to $10,950 for all wages and commissions earned within 180 days prior to the filing of the bankruptcy petition

Hiring a Bankruptcy Expert

Most corporations that restructure their debts under Chapter 11 are allowed to continue borrowing money to keep the business going. These lenders are given a special priority to guarantee payment for the loan. If you are contemplating filing for bankruptcy and don’t know which Chapter may suit your needs, it’s best to consult with a bankruptcy attorney for legal advice.