Who Gets Paid First in Chapter 11 Bankruptcy?

In a Chapter 11 bankruptcy, claimants get paid in a strict order: domestic support obligations like child support and alimony come first, then the administrative costs of running the case, then any superpriority financing the court approved to keep the business alive, then secured creditors up to the value of their collateral, then a ranked list of priority unsecured claims (recent employee wages, benefit contributions, consumer deposits, and government taxes), then general unsecured creditors, and finally equity holders. The Bankruptcy Code enforces this order rigidly. A reorganization plan generally cannot pay anything to a lower tier until every higher tier is satisfied in full, which is why the position of your claim often decides whether you recover everything, pennies on the dollar, or nothing at all.

The Absolute Priority Rule

The backbone of the Chapter 11 payment order is the “absolute priority rule.” When a class of creditors votes against a proposed plan, the court can still confirm the plan over their objection, but only if no one ranked below the dissenting class receives or keeps anything of value.¹ A business owner cannot hold onto equity in the reorganized company while leaving unsecured creditors partially unpaid, unless those creditors agree to it.

The rule works alongside the “best interest of creditors” test. Every creditor, even one who voted yes, must receive at least as much as they would have gotten in a Chapter 7 liquidation. Together, these two requirements force any plan to respect both the priority ladder and the floor set by liquidation value.

Domestic Support Obligations

Child support and alimony owed to a spouse, former spouse, or child of the debtor sit at the very top of the ladder, ahead of every other category.² This comes up most often in Chapter 11 cases filed by individuals or sole proprietors, but the rule applies in every Chapter 11 filing.

There is one narrow carve-out. If a trustee has been appointed, the trustee’s administrative costs for managing the assets available to pay support obligations get paid before the support claims themselves. The support obligations still outrank every other creditor category.

Administrative Expenses of the Case

Next come the costs of running the bankruptcy itself.² This includes attorney and accountant fees for the estate, wages paid to employees for work performed after the filing date, and the ordinary operating expenses of keeping the business running during reorganization.³ Quarterly fees owed to the U.S. Trustee’s office fall here too.

If the professionals steering the reorganization can’t get paid, the process collapses. Vendors and suppliers who extend credit to the debtor after the filing date also earn administrative-expense status on those post-petition bills, which is how many companies continue to receive shipments despite the pending case.

DIP Financing and Superpriority Claims

A company in Chapter 11 often needs new money. If the debtor-in-possession cannot borrow on ordinary terms, the court can offer escalating incentives to a new lender. At the top of that escalation, the court can grant a “superpriority” claim that ranks above all other administrative expenses.⁴

The court can also authorize liens on previously unencumbered property, or grant a senior “priming” lien that jumps ahead of existing secured creditors, provided the existing lien holder receives adequate protection. If you hold an existing secured claim and a DIP lender gets a priming lien, your collateral position may be subordinated, which is why these hearings are often the most contested events in a case.

Secured Creditors

A secured creditor holds a lien on specific property, such as a mortgage on real estate or a security interest in equipment. The Code treats the claim as secured only up to the value of the collateral. If a lender is owed $2 million but the equipment securing the loan is worth $1.5 million, the lender has a $1.5 million secured claim and a $500,000 unsecured deficiency claim that drops into the general unsecured pool.⁵

For the secured portion, a plan generally must do one of three things: let the creditor keep its lien and receive deferred cash payments equal to the present value of the collateral, sell the collateral free and clear with the lien attaching to the proceeds, or provide the creditor with the “indubitable equivalent” of its claim.¹ Secured creditors rarely walk away empty-handed, but they don’t always walk away with cash.

Priority Unsecured Claims

Below secured creditors sits a group of unsecured claims that Congress singled out for special treatment. They are ranked in a specific internal order, and the dollar caps adjust for inflation every three years.

Employee Wages and Benefits

Unpaid wages, salaries, commissions, and earned vacation or sick pay receive fourth-priority status, but only for amounts earned within 180 days before the bankruptcy filing (or the date the business stopped operating, if earlier). The cap is $17,150 per employee as of April 2025.⁶ Anything above the cap drops to general unsecured status.

Contributions owed to employee benefit plans come next as the fifth priority, with the same $17,150-per-employee calculation, minus whatever was already paid under the wage priority.² The 180-day lookback window applies here too.

Consumer Deposits

If you paid a deposit toward goods or services from the debtor for personal or household use and never received what you paid for, that deposit receives seventh-priority treatment up to $3,800 per person.⁶ Think of a furniture store that took your deposit, filed bankruptcy, and never delivered the couch.

Government Tax Claims

Tax claims occupy the eighth priority slot. Income taxes, employment taxes, and certain property taxes all qualify, subject to lookback periods that vary by tax type.² Unlike most unsecured creditors, tax authorities rarely settle for deep discounts in a plan.

General Unsecured Creditors

Once every priority tier is satisfied, whatever remains goes to general unsecured creditors. This group includes suppliers, vendors, credit card issuers, landlords with lease rejection damages, and anyone else without collateral backing their claim. In most Chapter 11 cases, it is the largest class by headcount and often by total dollar amount.

Recovery rates vary enormously. In a healthy reorganization where the business has real going-concern value, general unsecured creditors might recover 30 to 50 cents on the dollar. In a liquidating Chapter 11, they might see single digits or nothing. The plan typically groups these creditors into one or more classes that vote on the proposal. A class accepts when more than half the creditors holding at least two-thirds of the total claim amount vote yes. If a class accepts, the absolute priority rule doesn’t come into play against that class.

Equity Holders

Shareholders, members, and business owners sit at the bottom. Under the absolute priority rule, they receive nothing unless every creditor class above them is paid in full or has accepted the plan.¹ In the vast majority of Chapter 11 cases, liabilities exceed assets, so equity gets wiped out entirely.

A narrow judicial doctrine called the “new value exception” sometimes allows existing owners to retain their interest if they contribute fresh capital, not future labor or sweat equity, to fund the reorganization. The Supreme Court has held that promises of future work do not count. Courts scrutinize these contributions heavily, and an objecting creditor class can still challenge whether the contribution is sufficient.

When Priority Gets Rearranged by Subordination

The default ladder can shift in two ways. Creditors can agree among themselves to subordination arrangements, as when a mezzanine lender contractually agrees to stand behind a senior lender. Bankruptcy courts enforce those agreements.⁷

The court can also order “equitable subordination,” pushing a creditor’s claim below other claims of the same or lower rank. This usually involves an insider, like a controlling shareholder who also lent money to the company, who engaged in fraud or other inequitable conduct that harmed other creditors. The court can also transfer any lien securing the subordinated claim to the bankruptcy estate. Courts use the remedy sparingly, and only when the creditor’s behavior was genuinely egregious.

Small Businesses Under Subchapter V

Small businesses that qualify for Subchapter V of Chapter 11 play by somewhat different rules on who gets paid. The absolute priority rule does not apply.⁸ Even if a creditor class objects, the court can confirm the plan as long as the debtor commits all projected disposable income over a three-to-five-year period to plan payments.

A small business owner can therefore keep equity in the company without paying unsecured creditors in full and without contributing new capital. The tradeoff is that the owner’s future earnings effectively fund the plan. The current debt ceiling for Subchapter V eligibility is approximately $3 million in total debts, though legislation has been proposed to raise that threshold to $7.5 million.

If the Case Converts to Chapter 7

Not every Chapter 11 ends in a successful reorganization. If the debtor is suffering continuing losses with no realistic chance of recovery, grossly mismanages the estate, fails to file a plan on time, or defaults on a confirmed plan, the court can convert the case to Chapter 7 or dismiss it.⁹

On conversion, a trustee liquidates the assets and distributes the proceeds in essentially the same priority order: first the statutory priorities under Section 507, then general unsecured creditors who filed timely proofs of claim, then late-filed claims, then penalties and punitive damages, then post-petition interest, and finally anything left over returns to the debtor.¹⁰ Conversion usually produces worse outcomes across the board because the business loses its going-concern value, and the administrative expenses from the failed Chapter 11 still get paid first out of what remains.

1
Office of the Law Revision Counsel. 11 US Code 1129 – Confirmation of Plan
2
Office of the Law Revision Counsel. 11 USC 507 – Priorities
3
Office of the Law Revision Counsel. 11 USC 503 – Allowance of Administrative Expenses
4
Office of the Law Revision Counsel. 11 USC 364 – Obtaining Credit
5
Office of the Law Revision Counsel. 11 US Code 506 – Determination of Secured Status
6
Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases
7
Office of the Law Revision Counsel. 11 US Code 510 – Subordination
8
Office of the Law Revision Counsel. 11 USC 1191 – Confirmation of Plan
9
Office of the Law Revision Counsel. 11 USC 1112 – Conversion or Dismissal
10
Office of the Law Revision Counsel. 11 US Code 726 – Distribution of Property of the Estate