When a company files for bankruptcy, its creditors hope to be paid. The chances of getting paid from bankruptcy proceeds depends on the type of creditor, the amount owed and whether the creditor is considered secured or unsecured.
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Businesses that are brought in to help administer the bankruptcy are paid from the proceeds first. Cleaning services for equipment sold at auction, the auction company that administers the sale of the assets, the accountant who prepares the final accounting postings and the newspapers that ran the ads announcing the company closing, auction and bankruptcy are examples of creditors that would be paid first.
Banks that hold mortgages for office buildings, equipment and lines of credit are the first pre-bankruptcy creditors paid from bankruptcy proceedings. Other secured creditors include auto dealerships with lease contracts, back wages to employees and any other rental or lease companies. Many times, payment to these creditors consist of the return of the collateral items, for example, the office building or vehicle and any remaining cash balances are paid from the auction proceeds.
Credit card companies, insurance providers and other creditors without tangible assets at stake are paid after administrative and secured creditors. Bankruptcy proceeds to pay unsecured creditors are limited; if there are funds available, these creditors will often receive only a fraction of what is actually owed.
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