The Limitations Of Administrative Expense Claims

By Jason Binford (October 5, 2017, 11:34 AM EDT) -- Creditors lacking liens to secure their claim can fare poorly in a bankruptcy case. The "absolute priority rule" is a bedrock principle of bankruptcy law and provides that a creditor at a particular rung of the claim priority hierarchy must be paid in full before any money flows down to junior creditors. Secured creditors reside near the top of the hierarchy, followed by administrative expense claimants, priority claimants and general unsecured creditors. In many cases, there is insufficient money to pay secured creditors in full, thus leaving general unsecured creditors with no recovery at all. In other cases, the funds flowing to general unsecured creditors are sufficient to pay only pennies on the dollar. Because of this dynamic, creditors are incentivized to argue that their claim should be classified as high up the hierarchy as possible....

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