How Do Creditors Get Paid in Bankruptcy?
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Chapter 7 starting at $999, plus filing fees and costs.
Chapter 13 starting at $2,500, plus filing fees and costs.
What is a claim?
A claim is a right to payment. The right to payment does not need to be reduced to judgment at the time of bankruptcy filing and it does not need to be monetary – it can be equitable. The court can determine the amount of the claim if it is disputed or, in some circumstances, estimate the amount if it is contingent or unliquidated.
For the creditor to share in the bankruptcy distribution, the claim must be allowed. The first step in the allowance process is for a creditor to file their “proof of claim,” which is a written statement setting forth the creditor’s claim. Once the proofs of claim are filed, the debtor, the bankruptcy trustee, and other creditors can review the claims and object to those they believe are invalid. If there is no objection to the proof of claim, the claim is deemed allowed. If an objection is filed, the bankruptcy court will determine the validity and the amount of the claim. If the court disallows the claim, it will not participate in distribution.
How are claims paid in Chapter 7 bankruptcy?
Only allowed claims can share in the bankruptcy distribution. These claims are prioritized and are paid based on their priority status in bankruptcy. There are three types of claims: secured, priority unsecured and non-priority unsecured.
The first creditors to be paid are those with secured claims. Secured claims are claims attached to certain property, i.e., collateral, such as a house or a car. Secured claims are entitled to be paid from the property they attach to. If the debtor does not pay the debt, the secured creditor has the right to repossess the collateral. Priority unsecured claims are paid second. Non-priority unsecured claims are paid last.
Unsecured creditors are classified into priority unsecured and non-priority unsecured. Unsecured creditors are creditors with no rights against any property of the debtor, such as credit cards, medical bills, personal loans, student loans, taxes, domestic support obligations, etc. Certain unsecured creditors, however, are given priority over other unsecured creditors in bankruptcy, such as most domestic support obligations, most taxes, bankruptcy administrative expenses, etc.
Priority unsecured claims are entitled to be paid in full before any distribution is made to non-priority unsecured debts.
Priority claims are further divided into ten priorities. Claims of a higher priority must be paid in full before claims of a lower priority.
First Priority
Domestic Support Obligations
Second Priority
Administrative Fees and Costs
Third Priority
Pre-Petition costs incurred in involuntary bankruptcy cases.
Fourth Priority
Employee wage claims up to $15,150 each, for the 180 days before bankruptcy or the date when the debtor ceased its business, whichever is earlier.
Firth Priority
Unpaid contributions to employee benefit plans for 180 days before bankruptcy or the closing of the business.
Sixth Priority
Claims of gain producers and fishermen up to $7,475 each.
Seventh Priority
Claims of individuals related to deposits in connection with the purchase, leave, or rental property, or the purchase of services, for personal, family or household use, that were not provided up to $3,350 each.
Eighth Priority
Pre-petition taxes.
Ninth Priority
Claims related to commitments to maintain capital of insured depository institutions.
Tenth Priority
Claims for death or personal injury resulting from drunk driving.
In addition to the above listed ten priorities, certain claims enjoy “super” priorities, i.e., they can be paid before the ten priorities above, such as claims in connection to inadequate protection, claims for credit extended post-petition, and administrative expense of Chapter 7 trustee over Chapter 13 trustee when the case is converted from Chapter 13 to Chapter 7.
The non-priority unsecured claims are paid after all priority claims have been paid and they share in the left-over amount pro rata.
How are claims paid in Chapter 13 bankruptcy?
In a Chapter 13, a debtor devotes all of his disposable income to a Chapter 13 re-payment plan for 3-5 years for payment of unsecured creditors’ claims. Disposable income is the amount the debtor has left at the end of the month after paying allowed living expenses.
The priority unsecured creditors must be paid in full through the life of the plan. Non-priority unsecured creditors, however, are only left over with the debtor’s projected disposable income over the life of the plan, which in most cases represents only a small percentage of the total unsecured debt. The non-priority unsecured creditors share the projected disposal income pro rata. Thus, the extent to which non-priority unsecured creditors are paid in a Chapter 13 case depends on the debtor’s ability to pay.
In Chapter 13, however, the court may allow separate classification and treatment of unsecured claims, i.e., the debtor may be able to pay certain unsecured debts in full through the life of the plan in preference to other unsecured claims. Typically, classification is proposed with respect to non-dischargeable debts, such student loans and certain taxes, or debts to creditors with whom the debtor wishes to maintain a good relationship.
How can we help?
If you live paycheck-to-paycheck and struggle to pay your debts, call us for a free phone consultation to learn your options. You may qualify for Chapter 7 bankruptcy; however, it does not mean that it is the only option or the best option in your situation. There are many alternatives to bankruptcy, such as debt settlement, debt consolidation, liquidation of assets, asset protection, and sometimes even just knowing your rights and doing nothing.
At Anna Handy Law Firm, P.A., we are acutely aware of the financial strain of our clients. We do not charge you for the initial phone consultation. We do not push you to file bankruptcy to get a retainer. We don’t judge – we find solutions. We give you honest advice about your options and rights, including the “doing nothing” approach. As such, we offer very affordable bankruptcy fees. We make our fees competitive and in certain cases, we offer payment plans to address each case individually as each case has a different set of circumstances.
If you are overburdened by your debts, being sued or harassed by creditors, or subject to wage garnishment, do not hesitate to call us now for a free initial phone consultation. The attorney’s direct business cell phone number is (386) 248-3000. You may also email us at [email protected].