Bankruptcy Bankruptcy Creditors, Claim Priority & Superpriority

  1. In bankruptcy law, there are levels of priority for which claims against a debtors assets are paid. Some debt claims may have priority over others. The most powerful of all debt claims in bankruptcy is the superpriority claim.

    If you are new to bankruptcy claims, let’s define the terms that are and will be used in this article. A person or business who files a bankruptcy claim is referred to as a “debtor” – a person in debt. A person or business who is owed money by a debtor is referred to a “creditor.” In some cases, the creditor is also known as a “judgment creditor” when the creditor has been awarded the debt after a judgment in court. The “trustee” is the person who is granted the power by a bankruptcy court to take control over and protect a debtor’s assets.

    Bankruptcy Claims


    In general, a claim in a bankruptcy case refers to the right to receive a payment or a remedy that is ordered by a court directing the parties to either do or refrain from doing something. When money is loaned or borrowed, there is frequently a “security” in place that can be seized in case the debt isn’t paid by the debtor. For example, a home is the security for a mortgage loan. When a debt has no asset securing the debt, the claim is referred to as an unsecured debt.

    Priority – Debt Ranks


    The manner within which unsecured claims are paid from any money available in a bankruptcy case will depend on the “priority” for the debt. All debts in a bankruptcy case are ranked and assigned a priority for payment. Priority claims are generally specific types of expenses such as support claims (such as child support), taxes and other debts. Bankruptcy debts with higher priority are paid first and in full before claims with lower priority are paid (or not paid.)

    Some specific property of a debtor in bankruptcy cases is “exempt” from being seized, even against debts with priority. Exempt property includes clothing, basic household furnishings and, in some states, debtors in bankruptcy are allowed to keep their house. Whatever is left is normally used to pay off the creditors in the order of priority first.

    Adequate Protection


    Action may be required by the bankruptcy trustee in order to protect the creditor’s interest in property from the property decreasing in value. A creditor will have “adequate protection” against an asset’s decrease in value while a bankruptcy case is proceeding. The debtor may make additional payments or agree to a replacement lien which will adequately protect the creditor’s interest in the asset.

    Superpriority Claims


    If a bankruptcy claim is given superpriority status, it will have a greater priority than any other claim and unsecured claims. Exceptions include superpriority claims and liens which have been granted to lenders in place after the filing of the bankruptcy petition. In cases where the bankruptcy trustee provides adequate protection of a secured creditor’s interest in the creditor’s allowable claims, such claims will be afforded with priority over all other claims. The amount in the superpriority claim refers to debt amounts not covered by adequate protection (whose value would be protected.)

    Superpriority Claim Requirements


    In order for a creditor to be able to assert a superpriority claim, all of the following must be present:
    • The creditor has an allowable claim in the bankruptcy proceeding
    • The allowable claim arose from either (i) the use, lease or sale of property, (ii) a lien that was granted, or (iii) a stay of action which was granted;
    • Adequate protection was provided by the bankruptcy trustee
    Bankruptcy proceedings can become complicated matters when they involve claims with different priorities. Creditors should consider hiring an experienced bankruptcy lawyer when the amount of a secured debt is significant.
    Bankruptcy & Debt:
    Bankruptcy - Basics

    Michael M. Wechsler

    Michael M. Wechsler
    Michael M. Wechsler is an experienced attorney, founder of TheLaw.com and of-counsel to Kaplan, Williams & Graffeo, LLC. He was also an SVP and chief Internet strategist at Zedge.net and legal consultant at Kroll Ontrack, a leading service e-discovery and computer forensics service provider.

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