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The Absolute Priority Rule (APR) For Payments To Creditors Made By A Bankrupt
Corporation under Chapter 7 of the U.S. Federal Bankruptcy Reform Act of 1978.
Priority 1. The attorney's fees and court costs associated with the bankruptcy filing are
paid first.
Priority 2. If any funds remain after the attorneys are paid, any legal expenses incurred
between the filing of the bankruptcy petition and the appointment of the trustee are paid.
Priority 3. Any remaining proceeds from the bankruptcy go to pay back wages, up to a
maximum of $2,000 per worker.
Priority 4. After back wages are paid, if any liquidation proceeds remain, any past-due
contributions that the bankrupt firm might owe to its employee pension plan are made.
Priority 5. Whatever just consumer claims (eg, guaranteed product claims, injured
consumers, etc) might be outstanding are paid from any liquidation funds still remaining.
Priority 6. Any remaining liquidation proceeds are used to pay back taxes to federal, state,
and/or local governments.
Priority 7. If any proceeds from the bankruptcy auction are left at this stage, collateralized
creditors (holding secured loans) are paid. Mortgage lenders and other collateralized
creditors are given possession of their collateral or paid cash when their collateral is
liquidated. The secured creditors typically receive 53.8% of the money owed to them by the
bankrupt firm.
Priority 8. If any proceeds from the bankruptcy auction are left the General (or Unsecured)
Creditors are paid next. General creditors include raw material suppliers and public utilities
that extended credit to the firm without obtaining any collateral. On average, general
creditors to receive 38 cents of every dollar owed to them by the bankrupt corporation, but
the payment percentages vary from case to case.
Priority 9. Preferred stockholders are paid if any auction proceeds are left at this stage of
the payoffs. Four cents on each dollar paid for preferred stock is an average payment for this
category of creditor.
Priority 10. Common stockholders are paid last; they almost always receive nothing.
TABLE - Credit Quality Ratings Prepared by Moodys, S&P, etc
Filename: C:/InvestHO/Bankruptcy.APR.docx