We are often faced with creditors finding themselves on the wrong side of bankruptcy, and businesses owing them money attempting to wipe the slate clean through bankruptcy.
Often we are asked if there’s any hope of getting paid if the person that owes them money has filed for protection.
The answer is, an ambiguous “maybe”.
When someone is in receivership, there is an order to who gets paid first from any liquidation of assets. Creditors are divided into classes. Keeping things simple, there is secured and unsecured. In between, there are several others, but the basics are, whether or not the debt is “secured’. When you finance a car or a house, the lender has a security interest in that house or car. That means, if the car is liquidated in bankruptcy, the creditor with a secured interest in the car stands “first in line” to be paid what they are owed.
Secured Creditors are paid before Unsecured Creditors. A credit card is a typical form of “unsecured” debt. Unsecured Creditors will not get paid until the secured creditors have been paid first. If there is not enough money or assets to pay the secured creditors, a court will determine an equal percentage that each creditor will receive.
One of the keys to getting paid in a bankruptcy is to get in line and be sure that the courts are aware of your claim against the assets of the person (or business) filing for bankruptcy.
This is a very surface review of the priority of distribution, there are an incredible number of factors that come into creating classes, for instance, domestic support must be paid before employees, employees must be paid before… had the court already granted a judgement against the debtor prior to filing bankruptcy, is this a Chapter 7 or Chapter 13 bankruptcy, and the list goes on.
If you are attempting to get paid, and the debtor files for bankruptcy, having a discussion with a creditors’ rights attorney should be one of your very first steps. The laws around who gets paid, and how much they get paid in bankruptcy can be highly complex.