Order in which creditors are paid when the assets of a borrower are liquidated. Creditor priority is established under the first to file rule in the Uniform Commercial Code, and is summarized as follows: creditors holding a Security Interest in collateral are paid before unsecured creditors. As a general rule, holders of secured claims are paid in the order their claims were filed, starting with the earliest recorded lien.
For example, in a Voluntary Bankruptcy filed under Chapter 7 of the Bankruptcy Code, the debtor's assets are liquidated to meet unpaid obligations. In general, the bankruptcy estate is distributed as follows: (1) administrative costs, including court costs, trustee's fees, attorney's fees incurred by the debtor; (2) wage claims; (3) costs and expenses incurred by creditors; (4) federal, state and local tax claims; (5) debts having priority under federal law, i.e., claims of secured creditors, followed by claims of general creditors (unsecured creditors.) Creditors holding a perfected security interest are paid before other creditors. See alsoPreference; Set-Off Clause.
