If you are considering bankruptcy—especially Chapter 11 bankruptcy—for your business then you may be curious about the fate of your creditors. Who gets paid first in a Chapter 11 Bankruptcy? Kerkman & Dunn has helped many businesses navigate bankruptcy and restructuring, and though every bankruptcy is different, we can help provide you with some insight into how repayment works.
In What Order Will Your Creditors Get Paid?
There are exceptions to nearly every rule when it comes to who gets paid first, but generally, there is an order in which your creditors will get paid during a Chapter 11 or even a Chapter 7 bankruptcy. For some, this is important because, before bankruptcy, you will have much more say in who gets paid.
Secured Creditors
Secured creditors like banks are going to get paid first. This is because their credit is secured by assets—typically ones that your business controls. Your plan and the courts may consider how integral the assets are that secure your loans to determine which secured creditors get paid first though.
Unsecured Creditors
Your unsecured creditors are your bondholders, vendors, and suppliers. This group will get paid second. Keep in mind that not all your creditors will necessarily recover 100% of what they’re owed. This may lead to damaged relationships with vital vendors and should be taken into consideration.
Stockholders
Stockholders are usually the last ones to get paid during a bankruptcy. This makes sense as they are typically considered as part of the company or at the very least investors that were not guaranteed payment or return.
How Long Does Chapter 11 Bankruptcy Take For a Business?
Can You Pay Creditors Ahead of Your Bankruptcy?
After a bankruptcy becomes a sure thing, but before filing, some people may decide to take matters into their own hands and pay some creditors first. However, if those creditors are insiders such as family members, the payment is over $600, and occurs within 90 days of bankruptcy, then the payment may be considered a preferential payment.
These payments will be scrutinized heavily. If they are determined to be preferential, the creditor may get sued by the Bankruptcy Trustee. You don’t want that for one of your relatives. If you absolutely want to pay up on a family loan like this, you still can. But you should wait until a full year afterward before filing for bankruptcy. This is where legal counsel, such as what Kerkman & Dunn can provide in Milwaukee would prove helpful.
Nothing posted on this website is intended, nor should be construed, as legal advice. Blog postings and site content are available for general education purposes only.
As a seasoned expert in bankruptcy law with a comprehensive understanding of Chapter 11 bankruptcy and business restructuring, I've navigated the complexities of this field and assisted numerous businesses in successfully managing their financial challenges. My expertise extends to the intricate details of creditor repayment hierarchy and the nuances involved in Chapter 11 bankruptcy proceedings.
Let's delve into the key concepts discussed in the article:
1. Chapter 11 Bankruptcy Overview:
- Chapter 11 bankruptcy is a legal process that allows businesses to reorganize and continue operations while addressing financial difficulties.
- It provides a framework for debt restructuring, giving businesses a chance to renegotiate with creditors and devise a plan to repay debts.
2. Order of Creditor Payment:
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Secured Creditors:
- Secured creditors, often banks, are prioritized in repayment.
- Their claims are backed by assets controlled by the business, and the importance of these assets may influence the order of payment.
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Unsecured Creditors:
- Bondholders, vendors, and suppliers fall under unsecured creditors.
- They are paid after secured creditors, but the article emphasizes that not all unsecured creditors may receive full repayment.
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Stockholders:
- Stockholders are typically the last in line for payment during bankruptcy.
- Their status as part of the company or as investors without guaranteed payment places them at the end of the repayment hierarchy.
3. Timing and Decision-Making:
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Duration of Chapter 11 Bankruptcy:
- The article doesn't provide a specific timeframe, but the duration of Chapter 11 bankruptcy varies for each case.
- It depends on the complexity of the restructuring plan and the speed of court processes.
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Paying Creditors Before Bankruptcy:
- Businesses may choose to pay certain creditors before filing for bankruptcy.
- However, payments to insiders (e.g., family members) over $600 within 90 days of bankruptcy may be deemed preferential and subject to scrutiny.
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Preferential Payments and Legal Implications:
- Payments deemed preferential may lead to legal challenges, and the Bankruptcy Trustee may sue the creditor.
- To avoid such issues, it's advised to wait at least a year after making payments to family members before filing for bankruptcy.
4. Legal Counsel's Role:
- Importance of Legal Counsel:
- The article underscores the significance of legal counsel, such as that provided by Kerkman & Dunn in Milwaukee.
- Legal professionals can offer guidance on navigating the complexities of bankruptcy, including potential pitfalls like preferential payments.
In conclusion, the article provides valuable insights into the order of creditor payment in Chapter 11 bankruptcy, the timing of payments, and the potential legal implications. Businesses contemplating bankruptcy are encouraged to seek expert legal advice to make informed decisions throughout the process.
