Who Gets Paid First in Chapter 11?
In a Chapter 11 bankruptcy, the order of payment is determined by the absolute priority rule, which ensures that claims with higher priority are paid in full before any lower-priority claims receive payment. The hierarchy of payments is generally as follows:
- Debtor-in-Possession (DIP) Loans: These loans are given "super priority" status. They are provided to give the debtor company sufficient funds to continue operating during the reorganization process. 1
- Secured Creditors: These creditors have loans secured by assets owned by the debtor, such as real estate or equipment. Secured creditors are paid first because their claims are backed by collateral. 25
- Priority Unsecured Claims: These include certain administrative expenses, tax obligations, and employee claims for wages or benefits. They are unsecured but have a higher priority than general unsecured claims. 1
- General Unsecured Claims: These are obligations not backed by collateral and include most trade debts and other unsecured liabilities. 1
- Preferred Equity Holders: These shareholders have a higher claim on assets and earnings than common equity holders but are subordinate to all creditors. 1
- Common Equity Holders: These shareholders are last in line and typically receive payment only if all other claims have been satisfied in full. 12