How Creditors Get Paid in Chapter 11
In Chapter 11 bankruptcy, creditors are paid according to a strict hierarchy established by the Absolute Priority Rule (APR). This rule ensures that higher-priority creditors are paid in full before any payments are made to lower-priority creditors. Here's a breakdown of the payment order:
- DIP Loans: Debtor-in-Possession (DIP) loans have "super-priority" status. These are short-term loans provided to the debtor during the bankruptcy process to help the business continue operating. 23
- Secured Claims: Secured creditors, such as banks, are paid next. Their loans are secured by specific assets, such as property or equipment. 12
- Priority Unsecured Claims: These include administrative fees, tax obligations, and employee wages. These claims are unsecured but have priority over general unsecured claims. 23
- General Unsecured Claims: These are non-priority unsecured debts, typically based on contracts between the company and its creditors. These creditors are less likely to be paid in full. 23
- Preferred Equity: Preferred stockholders have higher priority distribution rights compared to common equity holders but are paid after all creditors. 23
- Common Equity: Common stockholders are the last to be paid and often receive little to nothing in a Chapter 11 bankruptcy. 23
- Plan Proposal: The debtor-in-possession proposes a reorganization plan that outlines how creditors will be paid. 47
- Creditor Approval: The plan must be approved by the creditors and the court. Creditors vote on the plan, and it must meet certain legal requirements. 47
- Plan Confirmation: Once approved, the plan is confirmed, and the repayment period begins. The debtor makes monthly payments according to the plan. 47
- Distribution: Payments are distributed to creditors according to the APR hierarchy. 23