Common Items Considered as Priority Debt in a Chapter 11 Filing

Business owners who wish to reorganize their debts using federal bankruptcy protection laws may choose to file under Chapter 11 when their debts are too high to qualify for Chapter 13. The business owner is referred to as a “debtor in possession” and acts as the trustee while remaining in control of the company. However, if there has been fraud or mismanagement of the business, the court can appoint a U.S. Trustee to oversee the case.

Who Gets Paid First?

Priority debts in Chapter 11 bankruptcy only mean that certain individuals and entities get paid ahead of the shareholders and unsecured creditors. Secured creditors will either get their collateral returned to them or the cash value of the collateral. The following are considered priority claims under federal bankruptcy law:

• Domestic Support Obligations—These are unsecured claims paid to a spouse, former spouse or the children of the debtor.

• Administrative Debts—This type of priority debt is created when someone provides goods or services to the bankruptcy estate. When the Creditors’ Committee is convened, they often call in professionals, such as accountants, to help with the estate. If a trustee is appointed to oversee the case, they will be viewed as a priority claim.

• Employees of the Business—All former employees have a priority claims for up to $10,950 for wages and commissions earned within 180 days prior to the case being filed or at the end of the business operations, whichever happened first.

• Service Providers—Anyone engaged in the production of raising grain or engaged as a U.S. fisherman can collect up to $5,400 each.

• Consumer Layaway Deposits—These will be paid to each in the amount of $2,425.

• Property—A sum of $1,800 will be paid to each individual that is connected with the purchase, lease or rental of property associated with the debtor.

• Taxes—Any taxes that were assessed within 240 days before the petition was filed, including property and wage taxes.

• Customs Duty—All duty fees arising out of importing merchandise within one year before the date of filing.

• Federal Depository Institutions—Any unsecured claims based upon commitment to a federal regulatory agency.

• Personal Injury Claims—These take priority if they arose while a motor vehicle was operated while the debtor was driving under the influence, resulting in injury or death to the victims.

In an involuntary bankruptcy petition, certain creditors may take priority if debts arose between the time the petition was filed and the automatic stay was issued by the court.

The Complexity of Bankruptcy Litigation

While the restructuring plan is underway, the business owner may need to continue borrowing money to keep it afloat. Lenders typically won’t allow debtors to borrow money during a bankruptcy proceeding. Therefore, these lenders are given “super priority” to guarantee they will receive payment for the loan. The federal laws governing bankruptcy and business are extremely complicate. It is important to get legal advice from an attorney who specializes in this area of law.