Today's blog is posted in response to an email I received asking how a bankruptcy trustee distributes payments it receives from debtors. The answer is that the terms of the Chapter 13 Plan that is approved by the Court control how the Trustee distributes the money.
In a typical Chapter 13 Plan, the administrative costs are paid first. In some districts this means that ALL administrative costs are paid before anything is paid to any creditors. In most jurisdictions, the administrative costs are paid a little bit per month and the remaining money is then divided pro rata among the other classes of creditors depending on priority.
First priority are administrative costs which include things like the Trustee's administration fee, outstanding attorney fees and costs and things like that. Next, secured creditors are paid. If there is more than one secured creditor and the Plan does not specify a "set" payment to a particular creditor, then the secured creditors would share the money that is available after administrative costs pro rata. This means that the largest claim gets a bigger portion of the money. The exact amount is determined by figuring out a ratio of the claim to the total of the claims in a particular class. The creditor then gets that percentage of the debtor's payment each month. The next class of creditors that would be paid are priority unsecured creditors and once those claims are paid in full, general unsecured creditors than begin to get paid, pro rata.
An ex-spouse who is owed child support or maintenance payments is a priority unsecured creditor. This creditor has priority over general unsecured creditors like credit card companies, medical providers, utility companies, etc... There are other priority unsecured creditors, but a detailed discussion of all of them is beyond the scope of this blog.
After all the secured and priority unsecured creditors are paid in full, then general unsecured creditors can start sharing, pro rata the money. In some plans there are separate classes of unsecured creditors, so each class could be treated differently. In the basic case, all unsecured creditors are treated the same and each creditor gets a pro rata share of the money. Remember, pro rata means that each creditor gets the share that represents the proportionate share its total claim has to all claims.
I'll leave you with an example. Assume 3 creditors, A, B and C. Creditor A is owed $5,000, Creditor B is owed $3,000 and Creditor C is owed $2,000. Assume the Debtor's Plan pays $300 per month and that there are no remaining administrative costs. Creditor A will get $150 of the $300 (50% of $300 since its $5,000 claim is 50% of the total general unsecured debt), Creditor B will get $90 (30% of $300, since its $3,000 claim is 30% of the total general unsecured debt), and Creditor C will get $60 (20% of $300, since its claim is 20% of the total general unsecured debt).
http://www.legalhelpers.com/blog/2005_07_01_archive.html
