Creditors and Bankruptcy

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In What Order are the Creditors Paid in a Bankruptcy Case?

While bankruptcy is a great way to get your debts discharged and get out of a bad financial situation, it simultaneously allows many creditors to get paid too. Creditors are allowed to collect some portion of the debt that is owed to them in both Chapter 7 (liquidation bankruptcy) and Chapter 13 (repayment plan) bankruptcies. The court appoints a bankruptcy trustee and they both are responsible to ensure that fair distribution of payment takes place. The payment process depends on the nature of the debt as well as the Chapter bankruptcy is filed under.

What is The Order of Priority in a Bankruptcy Case?

According to Los Angeles based law firm Recovery Law Group, there exists an order of priority according to which creditors are paid. The priority is always given to secured creditors followed by non-secured creditors such as credit card companies. This is so because secured creditors have collaterals attached to the debt such as mortgaged home, financed car, etc. Other debts which are prioritized include support payments (child or spousal), tax debts, employee benefits, etc. Once the secured debts are cleared, then unsecured debts are paid.

Chapter 7

During Chapter 7 bankruptcy, liquidation of assets takes place. The money so generated is used to clear off debts with the creditors. However, many times people filing for Chapter 7 bankruptcy may possess very few or no assets. In this case, sufficient funds to pay any or all creditors are not available. In case any asset is available, the payment is distributed in order of priority from secured to non-secured creditors.

Chapter 13

Even this chapter of bankruptcy gives priority to secured creditors over non-secured ones. The repayment plan made to the court-appointed bankruptcy trustee takes place over a 3-5 years’ time and gives payment to creditors in the order of priority. The remaining debt which remains at the end of the repayment plan becomes eligible for discharge.

One should remember that any debt which remains following either Chapter 7 (liquidation) payments or Chapter 13 (3-5 years repayment plan) are discharged. However, there are certain debts such as student loan debt, taxes, etc. which are not discharged during bankruptcy and you will still be liable to pay for them in full.

Having a proper understanding of the bankruptcy process and how creditors are paid and debts are discharged is important. Mostly people do not have any idea how the bankruptcy process takes place. It is therefore important to consult good bankruptcy lawyers so that they are aware of their rights and the options available to them before they file for bankruptcy.