Priority of Bankruptcy Creditors

In bankruptcy, the debtor is unable to afford debt obligations and has filed a bankruptcy petition with the court to seek relief. The creditors are the entities that have loaned money to the debtor and have not been paid as of the date of the bankruptcy filing. Bankruptcy claims include a right to payment or a right to a court-ordered remedy.

Secured debt is debt that is backed by some sort of collateral such as property or a lien. Unsecured debt is not backed by any collateral. Unsecured bankruptcy claims are repaid with available money (if any) in the estate in the order of priority.

Before any debt is repaid, debtors are allowed to claim certain exemptions, which vary depending on the state. In Colorado, debtors may keep certain necessary property up to a certain value, and keep this property away from the bankruptcy liquidation process. For example, the debtor is allowed to exempt up to $60,000 of equity in their homestead ($90,000 if the debtor is over 60 years old) and each debtor is able to exempt up to $3,000 in value of household goods.

After the exemptions are claimed and approved, the remaining assets (if any) are used in the liquidation process to repay the creditors. Claims are paid in order of priority. Claims with higher priority are paid in full before lower priority claims are paid.

A superpriority claim is superior to other claims. These claims have priority over most other unsecured claims. To protect the value of the creditor’s interest, adequate protection will be required. Adequate protection may require the debtor to make cash payments or provide an extra lien or a replacement lien that will result in the creditor’s property interest being adequately protected.

Adequate protection is necessary to protect the creditor’s interest from a decrease in value interest during the bankruptcy process.

In order to prove a superpriority claim, creditors have to prove that they truly possess a claim that should be given priority to the court. A creditor must show that the trustee provided adequate protection, the creditor has an allowable claim, and the claim arose from the stay of action, the use, sale or lease of property, or the granting of a lien, in order to qualify for superpriority claim status.