Who gets paid first

January 14, 1991

Here is the order of priorities, starting with the first, for (P payment in cases of bankruptcy liquidation:

1. Administrative costs such as insurance payments and fees for attorneys, trustees, accountants and auctioneers.

2. In case of involuntary bankruptcy, creditors whose claims arise after the filing of involuntary petition but before the court approves the bankruptcy. Normally, unsecured creditors stand in the lowest position (See No. 8). An involuntary bankruptcy can be filed against a business or individual by its creditors.

3. Wages, salaries and commissions earned within 90 days before the bankruptcy petition is filed. Each person is entitled to up to $2,000.

4. Contributions to employee benefit plans such as pensions, profit sharing and health care. The bankrupt entity is responsible for payments to such plans if the bill came due 180 days before filing or before closing of the business. The business is responsible for up to $2,000 for each employee.

This is an area of increasing bankruptcy litigation, according to Jerry S. Dunietz, a partner with the law offices of Edward J. Carnot in Rockville. Dunietz said increasingly employees find that employers that are in financial trouble and headed for bankruptcy court have not funded benefit plans. Often, for example, workers seek medical care only to find out later they were not covered because premiums were not paid.

5. Farmers' and fishermen's claims. In response to political pressure these claims were added to the priority list. Claims are covered up to $2,000 per individual.

6. Consumer deposits up to $900 per deposit. This protects consumers who may have put money down to hold merchandise.

7. Certain federal and local taxes have a priority. These include property taxes, "trust-fund" taxes such as employee withholding and Social Security and sales taxes.

8. Unsecured creditors. This is usually the largest list and can include anything from credit card payments to debts owed to major suppliers.

Secured creditors are entitled to special remedies. These creditors have protected their interest by requiring an individual or business to put up collateral to secure their debt.

"In the event of a bankruptcy . . . the best creditor to be is a secured creditor," Dunietz said.

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