The Priority of Creditors
As a general rule, if you’re seeking protection in a bankruptcy proceeding, it’s because you don’t have enough income or assets to satisfy all your creditors and meet your day-to-day needs. If you did, there would be no need for the bankruptcy filing. Accordingly, one of the basic determinations made as part of any bankruptcy filing is how the available assets or resources will be allocated among creditors. This is generally referred to as the “priority” of creditors.
Pursuant to bankruptcy laws, creditors are divided into “classes.” As a general rule, the highest class of creditors is paid in full before any subsequent class receives anything. If there are not enough assets to fully satisfy all members of a class, each member takes an even percentage of the assets available. There are specific priorities of distribution in all types of bankruptcy proceedings, including Chapter 7 and Chapter 13.
The Priority of Creditors in a Chapter 13 Bankruptcy Proceeding
In Chapter 13, the priority order of payment is as follows:
- Administrative claims, including trustee fees and attorney’s fees—Unless you have already paid your attorney (typically unlikely), the trustee first will pay your legal counsel and take out a percentage to cover trustee fees.
- Secured debts—A secured debt is one for which property has been pledged as collateral, such as a mortgage or car note.
- Priority debts—Priority debts (or claims) are generally non-dischargeable obligations that receive special treatment under the bankruptcy laws. The most common types of priority debts are family law obligations (e.g., child support and alimony) and tax arrearages.
- Unsecured debts—Any debt that is neither a priority debt nor a secured debt is considered to be general unsecured debt. Examples include credit card debt, medical bills, and personal lines of credit. These are the last creditors to be paid out of the bankruptcy estate.
Contact Our Offices
At the Law Office of Andrew B. Finberg, LLC, we bring comprehensive bankruptcy counsel to individuals in Burlington, Camden, and Gloucester counties in New Jersey. To schedule an appointment, call our office at 856-988-9055 (toll-free at 866-721-7269) or contact us online.