Who Gets Paid First in Liquidation: Secured Creditors, Wages, Equity

In a liquidation, secured creditors are paid first out of the specific property that backs their loans, and everything left flows through a fixed statutory order: unpaid child support and alimony, the costs of running the bankruptcy case, employee wages up to a capped amount, employee benefit contributions, taxes, general unsecured creditors, penalties and fines, post-petition interest, and finally the owners. No tier receives anything until the tier above it has been paid in full, and creditors inside the same tier share pro rata. That is who gets paid first in a liquidation, and the rest of this article explains what each position actually means for the people in it.

Secured Creditors Come First, but Only Up to Their Collateral

A secured creditor holds a lien on specific property, which is a legal right to seize that asset if the debt goes unpaid. That property is effectively pulled out of the general pool before the waterfall begins. The size of the secured claim is measured by the value of the collateral: if the collateral sells for enough to cover the debt, the creditor is paid in full from those proceeds; if it sells for less, only the collateral value counts as secured and the shortfall drops into the general unsecured tier far down the line.¹

Collateral can lose value while a case is pending. Equipment sits idle, inventory ages. The Bankruptcy Code answers this with “adequate protection,” which can take the form of periodic cash payments, a replacement lien on other property, or another arrangement that preserves the creditor’s economic position during the case.²

How the Rest of the Estate Is Divided

After secured creditors take their collateral, the trustee distributes what remains under 11 U.S.C. § 726. Priority claims come first in the internal order set by § 507, then general unsecured claims, then tardily filed claims, then penalties and fines, then post-petition interest, and anything left goes back to the debtor. Within any single tier, creditors share on a pro rata basis: each gets the same percentage of what they are owed.³

Domestic Support Obligations

Child support, alimony, and other family-support debts sit at the top of the unsecured priority ladder. Section 507(a)(1) gives first place to domestic support obligations owed to a spouse, former spouse, or child of the debtor.⁴ The statute covers any debt “in the nature of alimony, maintenance, or support,” whatever label the underlying order or agreement used.⁵

There is one narrow carve-out. Trustee administrative expenses can be paid ahead of a domestic support obligation, but only to the extent those costs were necessary to administer the assets producing the payment.⁴ Otherwise, a support claim has the strongest footing of any unsecured claim.

Administrative Expenses of the Case

Running a case costs money. Trustees hire attorneys and accountants, insure unsold assets, secure warehouses, and cover dozens of other expenses to keep the process moving. Those costs are paid ahead of nearly all other unsecured claims because the case cannot function without them, and only costs incurred after the filing qualify.⁶

Trustee compensation is capped by a sliding scale tied to the amount distributed: 25 percent of the first $5,000, 10 percent of the next $45,000, 5 percent of the next $950,000, and no more than 3 percent on anything above $1 million.⁷ Attorneys and other professionals bill separately, subject to court review for reasonableness.⁶ When a secured creditor holds liens on nearly everything the debtor owns, professionals sometimes negotiate a “carve-out” setting aside a portion of that collateral to fund the administration.

Employee Wages, Benefits, and Taxes

After administrative expenses, three groups get elevated treatment under § 507: workers, benefit plans, and tax authorities.

Wages and Commissions

Unpaid wages, salaries, commissions, and earned vacation or sick pay receive priority up to $17,150 per person, but only for amounts earned within 180 days before the filing.⁴ The $17,150 cap took effect April 1, 2025, and the next scheduled adjustment is in 2028.⁸ Anything above the cap or outside the 180-day window becomes a general unsecured claim. Most hourly workers fall inside the limit; higher-paid employees with months of back pay often do not.

Benefit Plan Contributions

Unpaid contributions to health, retirement, and similar plans also get priority. The pool is calculated by multiplying the number of covered employees by $17,150 and subtracting whatever was already paid under the wage priority, and the contributions must relate to services performed in the same 180-day window.⁴

Taxes

Tax claims rank eighth on the § 507 list, below employee-related priorities but above general unsecured creditors. Income taxes, payroll taxes that were withheld but never remitted, and certain property taxes all qualify.⁴ Government units also get a longer filing deadline than most creditors.

General Unsecured Creditors

Vendors, suppliers, landlords, credit card issuers, bondholders, and anyone else who extended credit without collateral lands here. By the time money reaches this tier, the pool is usually thin. If $200,000 is left and $2 million in general unsecured claims were filed, each creditor collects ten cents on the dollar. That pro rata split is required, so no creditor in this tier can jump ahead of another in the same tier.³

Creditors who file late but before the trustee starts final distribution can still be paid, only after timely filers are satisfied in full.³ Any general unsecured balance left when the money runs out is typically extinguished.

Equitable Subordination

A creditor who acted inequitably can be pushed below others in the same tier. Under § 510(c), a court may subordinate a claim when the holder engaged in misconduct, such as an insider who stripped assets before filing or a lender who exercised excessive control over the debtor’s business decisions.⁹ The claim survives, but it drops to whatever level the court sets.

Reclamation for Recent Sellers

A vendor who shipped goods to an insolvent buyer shortly before the filing has a narrow chance to take the goods back rather than stand in line. The demand must be in writing within 45 days of the buyer receiving the goods, or within 20 days of the filing if the 45-day period ended after the case began.¹⁰ Reclamation rights sit behind any secured creditor with a lien on the same goods. Sellers who miss the window may still be able to claim an administrative expense for goods delivered in the 20 days before filing.

Penalties, Fines, and Post-Petition Interest

Below general unsecured claims come fines, penalties, and punitive damages. The statute limits this tier to amounts that exceed compensation for actual loss, so only the punitive portion of a judgment lands here, not the compensatory portion.³ Below that sits post-petition interest, which is paid only if every creditor above has been made whole. Both tiers are rarely reached.

Equity Holders Last

Owners and shareholders are at the bottom. In Chapter 7, § 726(a)(6) sends any remaining property to the debtor only after every other tier is fully paid.³ In a Chapter 11 liquidating plan, the same outcome is enforced through the absolute priority rule, which prevents any junior class from receiving property under the plan unless every senior class has been paid in full or consents.¹¹ In most liquidations, equity holders get nothing.

When a surplus does exist, preferred shareholders are paid up to the liquidation preference in the company’s governing documents before common shareholders receive anything. Claims arising from buying or selling the debtor’s securities are automatically subordinated to the level of the security itself, so a fraud claim tied to common stock ranks with common stock, behind every creditor.⁹

File a Proof of Claim, or None of This Helps You

Priority is only useful if you are on the list. In a Chapter 7 case with distributable assets, unsecured creditors in a voluntary case must file a proof of claim within 70 days after the order for relief.¹² Government units get 180 days from the filing date. In a “no-asset” case, creditors are told not to file at all; if the trustee later recovers assets, the court reopens the claims window and sends notice.¹³ A late or sloppy filing can drop your claim a tier or knock it out entirely, so this is where most creditors should concentrate their attention.

Being Paid Isn’t the Same as Keeping the Money

One boundary worth knowing before you count on your position in the waterfall: payments made shortly before filing can be pulled back into the estate. If the debtor paid a creditor within 90 days before filing and the payment gave that creditor more than it would have received in the liquidation distribution, the trustee can recover the payment and redistribute it. For insiders such as officers or family members, the lookback stretches to a full year.¹⁴

A clawback demand does not mean you did anything wrong. The rules exist to enforce equal treatment among creditors of the same rank. Common defenses include showing that the payment was made in the ordinary course of business between you and the debtor, that it was for goods delivered within 20 days, or that it was part of a contemporaneous exchange for new value. Deliberate fraudulent transfers face a longer lookback of two years.¹⁵

1
Office of the Law Revision Counsel. 11 USC 506 – Determination of Secured Status
2
Office of the Law Revision Counsel. 11 US Code 361 – Adequate Protection
3
Office of the Law Revision Counsel. 11 USC 726 – Distribution of Property of the Estate
4
Office of the Law Revision Counsel. 11 USC 507 – Priorities
5
Office of the Law Revision Counsel. 11 US Code 101 – Definitions
6
Office of the Law Revision Counsel. 11 USC 503 – Allowance of Administrative Expenses
7
Office of the Law Revision Counsel. 11 USC 326 – Limitation on Compensation of Trustee
8
Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases
9
Office of the Law Revision Counsel. 11 US Code 510 – Subordination
10
Office of the Law Revision Counsel. 11 US Code 546 – Limitations on Avoiding Powers
11
Office of the Law Revision Counsel. 11 US Code 1129 – Confirmation of Plan
12
Legal Information Institute. Federal Rules of Bankruptcy Procedure Rule 3002 – Filing Proof of Claim or Interest
13
United States Courts. Chapter 7 – Bankruptcy Basics
14
Office of the Law Revision Counsel. 11 US Code 547 – Preferences
15
Office of the Law Revision Counsel. 11 US Code 548 – Fraudulent Transfers and Obligations