In bankruptcy, the priority that creditors receive is determined by the type of debt. The first party to be paid is the United States Bankruptcy court who charges fees for filing. Next to be paid is secured creditors, or creditors who hold a lien on property that is in possession of the debtor. Examples of this would are mortgages on homes and unpaid balances on cars.
After that, unsecured creditors are paid. There is no property involved that these creditors may repossess. Of unsecured debts, the first of these debts to be paid is domestic support, which includes alimony and child support, certain tax obligations, and injury or death caused by an intoxicated motor vehicle accident. Other examples of unsecured debts include credit card debt, medical bills, and personal loans. Student loans are also considered unsecured debts, however, they cannot be discharged unless you can prove that it would be an undue hardship to pay them – which is extremely difficult to prove.
Following that, the next group of creditors to be paid are the costs of administration in the bankruptcy case, including the trustee’s fees, clerk’s fees, and the attorney’s fees. It is important to note that creditors do not get paid automatically. They must submit a proof of claim to the court in which they indicate a claim’s priority status. The trustee or the court-appointed individual who oversees the case reviews all of the submitted claims and will distribute the funds to the creditors by priority. If money remains after that, the trustee will then pay claims that do not have priority.
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