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Creditors who have priority in Chapter 11

On Behalf of | Sep 11, 2019 | Bankruptcy, Chapter 11 | 0 comments

The main benefit of Chapter 11 bankruptcy is that it allows your Staten Island business time to pay debts while you reorganize your operation so that it can become profitable. As part of your reorganization, you need to work out a plan to pay your creditors. However, you will not have full control over which creditors to pay first. Bankruptcy law dictates that particular creditors will be given priority.

The U.S. Courts website explains that in general, a repayment plan under Chapter 11 will include a hierarchy of creditors. This hierarchy will include secured creditors at the top. These are creditors who loaned money on the basis of the borrower offering collateral for the loan. Unsecured creditors are next in line. Some unsecured creditors will be granted priority status while others will be classified as general unsecured creditors. Below unsecured creditors are equity security holders.

The Motley Fool identifies the kinds of creditors that exist under this hierarchy. A secured creditor is likely to be a bank that loaned your business capital. Unsecured creditors are typically companies that supplied your business with services or goods. Material goods may include inventory for your business, company supplies, or materials used for the physical building of your business. Equity security holders, which are generally the last parties to get paid, include people who own stock in your business.

Even if you know which creditors you will have to pay back, the amount each creditor will receive is going to differ. Some creditors will be entitled to a complete repayment of debt. Others could only wind up with a percentage of what they are owed. Creditors understand this fact and may contest the repayment plan if they feel it shortchanges them, such as casting a vote against it when it comes up.

Knowing which creditors you will likely have to pay is an important step in composing your reorganization plan. Business owners contemplating Chapter 11 should keep this and other important concerns in mind while preparing for a possible bankruptcy.