Distribution of Property of the Estate
1. Order of Payment: Claimants in a Chapter 7 case receive distribution according to the order prescribed by Bankruptcy Code sections 725 and 726.
a. Secured creditors: Claims that have been allowed as secured are paid first. They are paid from the collateral securing their claims. Bankruptcy Code §725. Remember that in bankruptcy a claim is deemed secured only to the extent of the value of the creditor's collateral. Bankruptcy Code §506(a).
Over secured creditors: Recall that, to the extent that the value of a secured parties collateral exceeds his allowed secured claim, any post-petition interest, and any fees, costs, or charges that are allowed generally accrue until the time of distribution in a Chapter 7 case. Bankruptcy Code §506(h).
b. Priority claims: Next, unsecured claims entitled to priority under section 507 are paid in the following order [B.C. §726(a)(l)]:
(1) Administrative expenses [B.C. §507(a)( 1 )];
(2) Involuntary case gap claims [B.C. §507(a)(2)];
(3) Wages, salaries, or commissions [B.C. §507(a)(3)];
(4) Contributions to employee benefit plans [B.C. §507(a)(4)];
(5) Claims of grain farmers and United States fishermen [B.C. §507(a)(5)];
(6) Consumer lay away claims [B.C. §507(a)(6)[;
(7) Unsecured pro-petition taxes [B.C. §507(a)(7)]; and
(8) Capital requirements of an insured depository institution [B.C. §507(a)(8)].
c. General unsecured claims: After the priority claims have been satisfied, the general unsecured claims that have been filed timely and have been allowed are paid. Bankruptcy Code §726
Justifiably tardy claims: Also included in this category are claims that have been filed late due to the creditor's lack of notice or actual knowledge of the case—as long as the claims were filed in time for distribution. [B.C. §726(a)(2)(C); In re Columbia Ribbon & Carbon Manufacturing Co., 13 Bankr. Ct. Dec. 962 (Bankr. S.D.N.Y. 1985)]
d. Unexcused tardy claims: Unsecured claims that were filed late, without legal justification (see above), are paid after the other general unsecured claims. [B.C. §726(a)(3)]
e. Penalty claims: Next in the order of distribution are unsecured or secured claims for punitive, exemplary, or multiple damages, or for lines, penalties, or forfeitures that do not constitute compensation for actual pecuniary loss. [B.C. §726(a)(4)]
f. Interest: If the estate is solvent, after all of the claims above have been satisfied, post-petition interest at the legal rate is paid on claims under section 726(a)(l)-(4) from the date that the bankruptcy petition was filed. [B.C. §726(a)(5)]
g. Payment to debtor: If there is any properly of the estate left after payment of post-petition interest on the unsecured claims, it is distributed to the debtor. [B.C. §726(a)(6)]
Pro Rata Payment: Claims within any type of priority under section 507(a), or within any level of distribution under section 726(a), share pro rata in the properly distributed to that particular category of claims.
a. Example: Debtor Corporation files a voluntary Chapter 7 petition. There are no secured creditors, and the general unsecured claims total $30,000. Administrative expenses arc $5,000, and each of ten employees of Debtor Corporation holds a third priority wage claim in the amount of $1,000. Unsecured pre-petition tax claims, with seventh priority status, total $20,000. If the amount available for distribution is $10,000, the administrative expenses will be paid in full ($5,000), and the ten employees will receive $500 each. The holders of the priority tax claims and the general unsecured claims will receive nothing. [B.C. §726(b)]
b. Exception—converted case: |In a case that has been converted to Chapter 7 from Chapter 11, 12, or 13, the administrative expenses allowed in the Chapter 7 case after conversion have priority over any administrative expenses incurred prior to conversion. [B.C. §726(b)]
3. Community Property: If any properly of the estate constitutes community property [B.C. §54l(a)(2)], it must be segregated from other properly of the estate. Special rules for distribution apply, including the payment of administrative expenses, either from the community property or from the other properly ot me estate, as justice requires.
4. Exception-Subordination of Claims: While the claims in a Chapter 7 case ordinarily are paid in the order described above, some claims could be subordinated to a lower rank in the distribution, such as when there is a subordination agreement, there are claims of defrauded security holders, or the principles of equitable subordination apply. [B.C. §§726(a)]
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