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Who is Paid First in a Bankruptcy Case?

Posted By Allmand Law Firm, PLLC || 17-Jul-2017

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.

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