Priority of Claims in Bankruptcy: Secured, Priority, and Unsecured Order

The priority of claims in bankruptcy follows a fixed order set by federal law: secured creditors are paid from their collateral first, then a statutory ladder of priority unsecured claims is paid in full one tier at a time (domestic support, administrative expenses, gap-period debts, wages, employee benefits, consumer deposits, and taxes), then general unsecured creditors share pro rata whatever is left, followed by fines and penalties, post-petition interest, and finally equity holders. No lower tier receives a dollar until every higher tier is paid in full.

Secured Creditors Come First, But Only Up to Their Collateral

A secured claim is recognized only to the extent of the collateral’s current value. If you are owed $30,000 on a vehicle worth $20,000, you hold a $20,000 secured claim and a $10,000 unsecured claim for the shortfall.¹ That shortfall drops down into the general unsecured pool with everyone else.

The trustee decides whether to sell the collateral or surrender it. On a sale, proceeds go to the secured creditor up to the value of the lien, and an oversecured creditor can also collect reasonable interest and fees provided by the loan agreement. Before the secured creditor is paid, the trustee can deduct reasonable costs of preserving or selling the collateral, but only where those expenses actually benefited the secured creditor rather than the estate generally.¹

The Priority Unsecured Ladder

Once secured creditors are handled through their collateral, the estate’s remaining cash moves through a strict statutory ladder. Each tier is paid in full before the next tier sees anything. If the money runs out mid-tier, everyone in that tier shares pro rata and every tier below gets nothing.

Domestic Support Obligations

Alimony, child support, and other family support debts sit at the very top and are paid directly to the spouse, former spouse, or child owed the money. These obligations are also nondischargeable, so they survive the bankruptcy and remain owed even after the case closes.²³

Administrative Expenses

The cost of running the case comes next. This tier covers the trustee’s compensation, fees for attorneys and accountants hired to manage the estate, the actual costs of preserving estate property such as warehouse rent or utilities for a business, and certain post-petition taxes the estate incurs.⁴ Placing these payments near the top is what makes qualified professionals willing to work on bankruptcy cases at all.

Gap-Period Claims

In an involuntary bankruptcy, where creditors force the filing, debts the business incurs in the ordinary course between the filing date and the court’s order for relief take the next slot.² This protects vendors and employees who kept dealing with the business before the court stepped in.

Wages, Benefits, and Consumer Deposits

Three tiers protect workers and customers of a failed business. Employees owed wages, salaries, commissions, vacation pay, severance, or sick leave earned within 180 days before the filing get priority up to $17,150 per person.²⁵ Unpaid contributions to health insurance, retirement, and similar benefit plans for the same 180-day window also receive priority, capped at $17,150 per covered employee minus whatever was already paid under the wage priority. Customers who paid deposits for goods or services the debtor never delivered receive priority up to $3,800 per individual.

The Judicial Conference adjusts these dollar caps every three years. The figures above took effect April 1, 2025, and hold through March 2028.

Tax Claims

Government tax debts fill the eighth priority tier. This covers income taxes for returns due within three years before the filing, taxes assessed within 240 days before filing, and taxes still assessable as of the petition date, along with employment taxes and certain property taxes that meet specific timing windows.² Many of these tax debts are nondischargeable, so even if the estate pays nothing toward them, the debtor still owes them after the case closes.³

General Unsecured Creditors

Credit card balances, medical bills, personal loans, and the unsecured shortfall from undersecured collateral all land in the general unsecured class. These creditors see money only if every priority tier above them is satisfied in full. In most Chapter 7 cases that doesn’t happen, and general unsecured creditors receive pennies on the dollar or nothing at all.

When funds do reach this level, distribution is pro rata. Each creditor’s share equals their percentage of the total unsecured pool. If $15,000 remains and total general unsecured claims add up to $150,000, every creditor gets ten cents per dollar owed. No one in this class jumps ahead of another.

Timing still matters within the class. Creditors who file their proof of claim by the court deadline are paid first, and late filers drop to a lower sub-tier that only receives anything after all timely claims are satisfied. The one exception: a creditor who never received notice of the bankruptcy and could not have known about it is treated the same as a timely filer.⁶

Fines, Post-Petition Interest, and What Comes Back to the Debtor

Below general unsecured creditors sit two more tiers that rarely see a distribution. Fines, penalties, forfeitures, and punitive damages that do not compensate for actual financial loss are paid only after all general unsecured claims are covered. If anything is left after that, all claims already paid earn post-petition interest at the legal rate from the filing date forward. Only then does any remaining surplus go back to the debtor.⁶ Reaching these tiers usually means the debtor was solvent all along.

Equity Holders

Shareholders and owners sit at the very bottom. Under the absolute priority rule, equity holders receive nothing unless every creditor above them is paid in full. In a Chapter 7 liquidation of a corporation, the assets are almost always exhausted long before this level, and shareholders receive notice and little else.

Filing a Proof of Claim

The priority rules do not matter to a creditor who never files a proof of claim. In a voluntary Chapter 7 case, the deadline is 70 days after the petition date. Involuntary cases give creditors 90 days from the order for relief.⁷ Missing this deadline pushes your claim into the late-filed sub-tier and sharply reduces your chance of payment. The official form asks for the amount owed as of the filing date, the basis for the claim, and redacted copies of supporting documents like contracts, invoices, or account statements.⁸

How the Order Changes in Chapter 13 and Chapter 11

Everything above describes Chapter 7 liquidation, where assets are sold and distributed once. Chapters 13 and 11 work differently because the debtor proposes a repayment plan.

In Chapter 13, the plan must provide for full payment of all priority claims unless a particular priority creditor agrees to accept less.⁹ Domestic support arrears, priority tax debts, and administrative expenses all get paid in full over the three-to-five-year plan period. General unsecured creditors often receive only a fraction of what they are owed, depending on the debtor’s disposable income.

Chapter 11 reorganizations apply the absolute priority rule when a class of creditors votes against the plan. The debtor can force confirmation over that objection only by showing that no class junior to the dissenting one receives anything under the plan.¹⁰ Either unsecured creditors are paid in full or the owners walk away with nothing. One carve-out exists for individual Chapter 11 debtors, who can keep certain property that became part of the estate under specific conditions.

When Courts Rearrange the Order: Equitable Subordination

The ladder is not always final. A bankruptcy court can push a creditor’s claim down to a lower tier, and even strip a lien, where that creditor engaged in inequitable conduct that harmed other creditors or produced an unfair advantage. This power is called equitable subordination.¹¹ The classic case involves a corporate insider who lends money to the company while knowing it is insolvent and then tries to collect ahead of outside creditors. Congress codified the doctrine while leaving the specific standards to judicial case law, so it requires a showing of actual misconduct rather than mere bad luck.

1
Office of the Law Revision Counsel. 11 USC 506 – Determination of Secured Status
2
Office of the Law Revision Counsel. 11 USC 507 – Priorities
3
Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge
4
Office of the Law Revision Counsel. 11 USC 503 – Allowance of Administrative Expenses
5
Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases
6
Office of the Law Revision Counsel. 11 USC 726 – Distribution of Property of the Estate
7
Legal Information Institute. Federal Rules of Bankruptcy Procedure Rule 3002 – Filing Proof of Claim or Interest
8
United States Courts. Instructions for Proof of Claim Form 410
9
Office of the Law Revision Counsel. 11 USC 1322 – Contents of Plan
10
Office of the Law Revision Counsel. 11 USC 1129 – Confirmation of Plan
11
Office of the Law Revision Counsel. 11 USC 510 – Subordination