Who Gets Paid First in Chapter 11 Bankruptcy?

In a Chapter 11 bankruptcy, claims get paid in a fixed order: domestic support obligations first, then the administrative costs of running the case, then secured creditors up to the value of their collateral, then priority unsecured claims like recent employee wages and certain taxes, then general unsecured creditors, and finally equity holders such as shareholders or business owners. The Bankruptcy Code sets this hierarchy in rigid detail, and a reorganization plan generally cannot pay a lower tier anything until every higher tier is satisfied in full. Where a claim sits on this ladder usually decides whether the holder recovers everything, pennies on the dollar, or nothing.

The Two Rules That Enforce the Order

Two doctrines lock the priority order in place. The first is the absolute priority rule: if a class of creditors votes against the plan, the court can still confirm it over the objection, but only if no class ranked below the dissenting class receives or keeps anything of value.¹ A business owner cannot keep equity in the reorganized company while unsecured creditors go partially unpaid, unless those creditors agree.

The second is the best-interest-of-creditors test. Every creditor, even one who voted yes, must receive at least as much under the plan as they would in a Chapter 7 liquidation. Together, these two requirements force the plan to respect both the priority ladder and the floor set by liquidation value.

Domestic Support Obligations

Child support and alimony owed to a spouse, former spouse, or child of the debtor sit at the very top.² This matters most in cases filed by individuals or sole proprietors, but the rule applies across all Chapter 11 filings.

There is one narrow carve-out. If a trustee has been appointed, the trustee’s own administrative costs for managing assets available to pay support obligations get paid before the support claims themselves. That exception exists to make sure someone is available to collect and distribute the funds. The support obligations still outrank every other creditor category.

Administrative Expenses of the Case

The second tier is the cost of running the bankruptcy itself.² That includes attorney and accountant fees for the estate, wages paid to employees for work performed after the filing date, and the ordinary operating expenses of keeping the business alive during reorganization.³ Quarterly fees owed to the U.S. Trustee’s office also land here.

The reasoning is practical. If the professionals steering the case can’t get paid, no one will do the work, and the reorganization collapses. Vendors and suppliers who extend credit to the debtor after the filing date also earn administrative-expense status on those post-petition bills, which is how many companies keep operating despite the filing.

DIP Lenders With Superpriority

A company in Chapter 11 often needs new money to fund operations. If the debtor-in-possession cannot borrow on ordinary terms, the court can escalate the incentives for a lender in stages. At the top of that ladder is a “superpriority” claim that ranks above all other administrative expenses.⁴

The court can also authorize liens on previously unencumbered property, or grant a senior “priming” lien that leapfrogs existing secured creditors, provided the existing lien holder receives adequate protection of its interest. If you already hold a secured claim and a DIP lender receives a priming lien, your collateral position may be pushed down, which is why these hearings are often the most contested events in a case.

Secured Creditors

A secured creditor holds a lien on specific property, such as a mortgage on real estate or a security interest in equipment. The claim counts as secured only up to the value of the collateral. If a lender is owed $2 million on equipment worth $1.5 million, the lender has a $1.5 million secured claim and a $500,000 unsecured deficiency claim that drops into the general unsecured pool.⁵

For the secured portion, a Chapter 11 plan generally must do one of three things: let the creditor keep its lien and receive deferred cash payments equal to the present value of the collateral, sell the collateral free and clear with the lien attaching to the sale proceeds, or provide the “indubitable equivalent” of the claim.¹ Secured creditors rarely walk away with nothing, but they don’t always get cash. Sometimes the plan simply hands back the collateral and releases the rest.

Priority Unsecured Claims

Below secured creditors sits a group of unsecured claims that Congress singled out for special treatment. These categories are ranked in a specific order under Section 507, and the dollar caps adjust for inflation every three years.

Employee Wages and Benefits

Unpaid wages, salaries, commissions, and earned vacation or sick pay carry fourth-priority status, but only for amounts earned within 180 days before the bankruptcy filing, or before the business stopped operating if that came first. The cap is $17,150 per employee as of April 2025.⁶ Anything above the cap drops down to general unsecured status.

Contributions owed to employee benefit plans follow as the fifth priority, sharing the same $17,150-per-employee calculation, minus whatever was already paid under the wage priority.² The 180-day lookback window applies here too.

Consumer Deposits

If you paid a deposit toward goods or services for personal or household use and never received what you paid for, that deposit gets seventh-priority treatment up to $3,800 per person.⁶ Think of a furniture store that took your deposit, filed bankruptcy, and never delivered the couch.

Tax Claims

Government tax claims occupy the eighth priority slot. Income taxes, employment taxes, and certain property taxes all qualify, subject to lookback periods that vary by tax type.² Tax authorities protect these claims aggressively and, unlike most unsecured creditors, rarely settle for deep discounts.

General Unsecured Creditors

Once every priority tier is satisfied, whatever remains goes to general unsecured creditors. This group covers suppliers, vendors, credit card issuers, landlords with lease rejection damages, and anyone else without collateral. In most Chapter 11 cases, it is the largest class by headcount and often by total dollar amount.

Recovery rates vary widely. In a healthy reorganization with real going-concern value, general unsecured creditors might recover 30 to 50 cents on the dollar. In a liquidating Chapter 11, they might receive single digits or nothing. The plan typically groups them into one or more classes that vote on the proposal. A class accepts if more than half the creditors holding at least two-thirds of the total claim amount vote yes; if the class accepts, the absolute priority rule doesn’t come into play for it.

Equity Holders

Shareholders, LLC members, and business owners sit at the bottom. Under the absolute priority rule, they receive nothing unless every creditor class above them is paid in full or has accepted the plan.¹ In most Chapter 11 cases the debtor’s liabilities exceed its assets, so equity gets wiped out.

A narrow judicial doctrine called the “new value exception” sometimes lets existing owners keep their interest if they contribute fresh capital to fund the reorganization. The Supreme Court has held that promises of future work do not count. Courts scrutinize these contributions heavily, and even where they qualify, an objecting creditor class can challenge whether the contribution is enough.

When the Order Gets Rearranged

The ladder above is the default, but two things can shift it. Creditors can agree among themselves to subordination arrangements, such as a mezzanine lender contractually standing behind a senior lender, and bankruptcy courts enforce those agreements.⁷

Courts can also order “equitable subordination,” pushing a creditor’s claim below other claims of the same or lower rank. This typically comes up when an insider, like a controlling shareholder who also lent money to the company, engaged in fraud or other inequitable conduct that harmed other creditors. The court can also transfer any lien securing the subordinated claim to the estate. Courts use the doctrine sparingly and only for genuinely egregious behavior.

Subchapter V Small Business Cases Work Differently

Small businesses that qualify for Subchapter V of Chapter 11 don’t follow the same rules on this point. The absolute priority rule does not apply.⁸ If a creditor class objects, the court can still confirm the plan as long as the debtor commits all projected disposable income over a three-to-five-year period to plan payments.

A small business owner can therefore keep equity in the company without paying unsecured creditors in full and without contributing new capital. The tradeoff is that the owner’s future earnings effectively fund the plan. The current debt ceiling for Subchapter V eligibility is roughly $3 million in total debts, though legislation has been proposed to raise the threshold to $7.5 million.

1
Office of the Law Revision Counsel. 11 US Code 1129 – Confirmation of Plan
2
Office of the Law Revision Counsel. 11 USC 507 – Priorities
3
Office of the Law Revision Counsel. 11 USC 503 – Allowance of Administrative Expenses
4
Office of the Law Revision Counsel. 11 USC 364 – Obtaining Credit
5
Office of the Law Revision Counsel. 11 US Code 506 – Determination of Secured Status
6
Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases
7
Office of the Law Revision Counsel. 11 US Code 510 – Subordination
8
Office of the Law Revision Counsel. 11 USC 1191 – Confirmation of Plan