Who is Paid First in a Bankruptcy Case?

Originally published by Allmand Law Firm, PLLC.

Bankruptcy and discharges of debt are a great benefit for people facing
tough financial times, but bankruptcy also allows many creditors to get
paid as well. Both Chapter 7 bankruptcy (liquidation bankruptcy) and Chapter
13 bankruptcy (repayment plans) allow for creditors to collect at least
some portion of the debts they are owed.

The bankruptcy court and appointed trustee serve the purpose of ensuring
payment disbursement is done fairly. How the payment process works will
vary depending on the unique facts of a case, including nature of the
debt and the Chapter you file under.

Order of Priority

Generally, there is an order of priority when it comes to which creditors
will be paid first. This order trickles down from secured creditors to
non-secured creditors, such as credit card companies. Secured creditors
are paid first because they have collateral tied to debts, such as a financed
car or mortgaged home. Other priority debts include support payments,
tax debts, and employee benefits, among others. Unsecured debts are paid
after secured debts.

Chapter 7

Although
Chapter 7 bankruptcy is characterized by the liquidation of assets and the use of
those proceeds toward the payment of debts, many Chapter 7 cases involve
little to no assets. This means there may not be sufficient funds to pay
all or any creditors. Should there be some assets, payments would be distributed
in order of priority, from secured creditors to non-secured creditors.

Chapter 13

As in Chapter 7 bankruptcy,
Chapter 13 bankruptcy also prioritizes secured creditors over non-secured creditors.
Over the course of a three to five year repayment plan made in a consolidated
payment to the court-appointed trustee, payments will be dispersed to
creditors in order of priority. Remaining debt at the conclusion of the
plan is eligible for discharge.

It is important to remember that while remaining debts following liquidation
payments or the conclusion of a three to five year repayment plan can
be discharged, there are certain debts that you may still be liable to
pay in full. This includes student loan debt, which is not generally dischargeable
in bankruptcy.

Understanding how the bankruptcy process works and who receives payments
when is important as you navigate the journey ahead, but counsel and representation
from an experienced attorney can be invaluable. Our Dallas bankruptcy
lawyers at Allmand Law Firm, PLLC help clients throughout the Dallas –
Fort Worth area understand their rights and options when it comes to addressing
insurmountable debt. We’re available to discuss your situation,
options, and what we can do to help during a FREE financial empowerment session.
Contact us today to request yours.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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