Bankruptcy payment of dividends

3 key takeaways

• Dividends are the payments made to creditors from the assets of the bankruptcy estate.
• The distribution follows a priority order set by bankruptcy laws.
• Creditors may receive partial or full payment depending on the available assets.

What is the payment of dividends in bankruptcy?

In the context of bankruptcy, the payment of dividends refers to the process by which the bankruptcy trustee distributes the proceeds from the liquidation of the debtor’s assets to creditors. These payments are made according to the rules and priorities established by bankruptcy law, ensuring that creditors receive a fair share based on the type and amount of their claims.

The term “dividends” in this context does not refer to corporate profit distributions but rather to the proportional payments made to creditors from the debtor’s estate.

How does the dividend payment process work?

1. Asset liquidation: In a Chapter 7 bankruptcy, the trustee sells the debtor’s non-exempt assets to generate funds. In a Chapter 11 or Chapter 13 bankruptcy, the debtor may use income or other means to fund the repayment plan.
2. Claim filing: Creditors must file proofs of claim with the bankruptcy court to be eligible for dividend payments. These claims detail the amount owed and the basis for the debt.
3. Priority determination: The bankruptcy code establishes a hierarchy of claims, ensuring that certain types of debts are paid before others. Secured creditors, priority unsecured creditors, and general unsecured creditors all have different levels of priority.
4. Dividend calculation: The trustee calculates the available funds and distributes them to creditors based on the priority and amount of each claim. The amount each creditor receives is called a dividend.
5. Payment distribution: Dividends are paid out in one or more installments, depending on the availability of funds and the specifics of the bankruptcy case.

Priority of claims

1. Secured claims

• Definition: Debts backed by collateral, such as mortgages or car loans.
• Payment: Secured creditors are paid first from the proceeds of the sale of the collateral. If the collateral does not cover the full amount owed, the remaining debt becomes an unsecured claim.

2. Priority unsecured claims

• Definition: Certain unsecured debts given special priority by bankruptcy law, such as child support, alimony, and certain taxes.
• Payment: These claims are paid after secured claims but before general unsecured claims.

3. General unsecured claims

• Definition: Debts not backed by collateral and not given priority status, such as credit card debt and medical bills.
• Payment: These creditors receive payment only after secured and priority unsecured claims are fully satisfied. They often receive a smaller percentage of their claims.

Real-world application

Example: Lisa’s retail business files for Chapter 7 bankruptcy, and the trustee begins liquidating assets. The business has $50,000 from the sale of inventory and equipment.

Claims filed: Creditors file claims totaling $100,000, including:

• $20,000 secured claim (equipment loan)
• $10,000 priority unsecured claim (unpaid wages)
• $70,000 general unsecured claims (credit card debt and supplier invoices)

Priority and payment: The trustee distributes the $50,000 as follows:

• Secured claim: $20,000 paid in full to the equipment lender
• Priority unsecured claim: $10,000 paid in full to employees for unpaid wages
• General unsecured claims: Remaining $20,000 is divided proportionally among the $70,000 in claims, resulting in about 28.57 cents on the dollar for these creditors

Outcome: The secured and priority unsecured creditors are paid in full, while the general unsecured creditors receive a partial payment of their claims.