It’s a common misconception that when a debtor files for bankruptcy, all of their creditors are left in the dark, but this isn’t always the case. Money is readily available to pay creditors in almost all Chapter 13 cases and some Chapter 7 cases.
However, debtors are not automatically reimbursed. A creditor must use an official proof of claim form to submit a “proof of claim” to the court before they can get paid. Additionally, not all debts owed to creditors are handled equally.
Priority claims are obligations that are eligible for special consideration and will be paid before nonpriority claims. The creditor certifies whether a priority status exists by checking the box next to it in box 12 on the proof of claim form.
All claims submitted will be evaluated by the bankruptcy trustee, who has been appointed by the court to manage the case. The trustee will distribute money to priority creditors following the resolution of objections and confirmation of the plan in Chapter 13 bankruptcy. The trustee will pay claims without regard to priority if there is money left over.
Here are some typical priority claim examples:
- administration fees for the bankruptcy (such as accounting or legal fees)
- obligations for child and spousal support
- 180 days prior to bankruptcy, compensation of up to $15,150 was earned (wages, commissions, and other compensation)
- contributions to an employee benefit plan of up to $15,150
- deposits made by the filer to secure future personal goods, services, or housing are allowed up to $3,350.
- a fisherman may receive up to $7,475 for unpaid fish sold to a storage or processing facility.
- the government’s unpaid taxes, and
- Injury or fatality claims resulting from drunk driving-related car or boat accidents.
These numbers are valid as of April 1, 2022, and they continue to be so until March 31, 2025.
In a Chapter 13 case, each creditor requesting payment is required to submit a claim. If it appears that a Chapter 7 case is a “asset case,” meaning that funds will be available for distribution, the court will order creditors to submit claims. In contrast, in a “no-asset case,” creditors won’t submit claims.