A question we often get from clients and prospective clients is what can they do if they are owed money by a company that has filed for bankruptcy protection in New York. The answer depends on why they are money, when the debt arose, and what type of bankruptcy the company has filed.
1. Hierarch of Claims — Administrative, Secured, Priority & Unsecured
In bankruptcy cases not all claims are created equal. There is a hierarchy or rank order of claims that determines who comes first in the cash waterfall.
a) Administrative Claims. These are claims related to the administration of the debtor’s case. In a chapter 11 case administrative claims includes claims for goods sold or services provided to the debtor company after the date of bankruptcy filing. In addition, administrative claims in a chapter 11 case include post-bankruptcy use and occupancy charges related to the debtor’s real estate leases, and post-bankruptcy equipment and vehicle lease fees.
b) Secured Claim. A secured claim is a claim that is secured by collateral (i.e., a claim that has a lien on property of the debtor). Some common examples of secured claims are a mortgage secured by real estate, a vehicle loan secured by a vehicle, or a bank loan secured by the debtor’s assets or accounts receivable. In addition to these examples of voluntary secured claims, a debtor may be subject to involuntary secured claims, such as for tax liens or judgment liens.
c) Priority Claims. These are certain claims incurred prior to the debtor’s bankruptcy filing that are given priority (i.e., get paid ahead of other claims) as specified in the Bankruptcy Code. Common examples of priority claims are certain pre-bankruptcy wage and commission claims, certain taxes and other obligations to the government, and spousal and child support.