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Creditors in Bankruptcy: Who Gets Paid First?


There is a lot to consider when you file for bankruptcy. You may be wondering whether you are eligible for Chapter 7, whether it would be better to file for Chapter 13 and keep your property, and considering what happens to your business as well. There are an assortment of documents and tax returns to organize, decisions to make, and consultations to arrange with your bankruptcy attorney.

You are probably looking ahead to the day when you can say you are debt free, ready to experience new financial freedom, and move forward positively. In Chapter 7, once the bankruptcy is completed, you will see the discharge of your debts in three to six months. In Chapter 13, once you have completed the approved repayment plan, you also have a clean slate with which to move forward. This takes three to five years.

You may have questions regarding what goes on during the interim, however, and how the bankruptcy court decides to pay creditors. While there is much discussion about who cannot be paid before the bankruptcy to avoid preferential transfers to creditors or fraudulent conveyances to others, you may wonder how everyone gets paid once the wheels are in motion.

Creditors Are Supposed to be Paid Fairly in Bankruptcy

While discharge of or repayment of debts in full is a great benefit for you, bankruptcy also allows many creditors to get paid too. The bankruptcy court and the trustee go to great lengths to see that this is done fairly, which is why any payments to creditors ahead of time can be brought into question. As the automatic stay halts all collection activity, creditors then can give their proofs of claim to get in line for being paid through your bankruptcy estate.

Creditor Payments in Chapter 7

If there are not enough funds in the estate to pay everyone, payments are doled out by percentages to each creditor. In Chapter 7, secured creditors may quite simply be receiving their property (such as a home or car) back, unless you sign a reaffirmation agreement which says that you are still obligated to making payments on the property. Your non-exempt property is sold, with the proceeds going to creditors in order of priority, trickling down to non-secured creditors.

Creditor Payments in Chapter 13

In Chapter 13, again, secured creditors are paid before non-secured, as technically they may still be the owners of property being paid on—like a car that is still being financed. Other priority debts to be paid include payments such as family support and tax payments. After that, unsecured creditors follow, receiving whatever disposable income is left after those debts that are considered ‘priority’ are paid. That leftover amount is divided among the unsecured creditors. Debts such as student loans are generally not a part of this process at all as they usually aren’t dischargeable in a Chapter 7 bankruptcy, and are still in place after a Chapter 13.

Contact Us with All Your Bankruptcy Questions

If you are thinking about filing for bankruptcy or exploring other options for debt reorganization, contact us at Fitzgerald & Campbell, APLC. Our attorneys have decades of experience in serving clients with similar financial situations, as well as navigating student loan debt and bankruptcy. Let us review your case and discuss what would work best for you. We are here to help!

Call us today for a free consultation at (844) 431-3851, or email us at

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