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Creditor priority during bankruptcy – who gets paid first

In our post last week, we examined a few examples in which bankruptcy creates new priorities – advancing some creditors ahead, while bumping others further down the line. Since the bankrupt estate may not have enough assets to go around, the Bankruptcy and Insolvency Act BIA), prescribes a set order for repaying creditors. Our post this week examines theses eight classes.

1) Unpaid suppliers

This group may reclaim unpaid goods and have them returned before the bankrupt’s assets are collected and sold. However, this right can only be exercised after a number of conditions are met, as discussed in a previous post.

2) Unpaid fishermen, aquaculturists and farmers

Once unpaid suppliers have been repaid, this next group may secure their claim for goods supplied by charging the unpaid amounts against all inventory of the bankrupt. However, as with unpaid suppliers, stringent conditions and timelines must be met in order to qualify.

3) Source deductions owed to the Crown

As outlined in the BIA, the Income Tax Act and other federal legislation, amounts owing for EI, CPP and other source deductions rank third in super-priority.

4) Employee compensation

Employees of a bankrupt employer can collect termination, severance and vacation pay, and up to four weeks of unpaid wages through the Wage Earner Protection Program (WEPP). The amounts destined for this fund are charged against the bankrupt’s assets.

5) Unpaid pension contributions

The WEPP also covers unremitted pension contributions – but not accrued pension benefits – to an unlimited amount on behalf of employees.

6) Secured Creditors

Secured creditors are next in line to collect on their collateral. Although this class generally operates outside of a bankruptcy under the BIA, their claims are charged only after the above-mentioned super-priority claims.

7) Preferred claims

The BIA creates a sub-hierarchy that further prioritizes amounts for unusual claims, including:

  1. Funeral expenses of the bankrupt
  2. Trustee fees and costs to administer the bankruptcy
  3. Bankruptcy levy
  4. Child or spousal maintenance and support payments
  5. Municipal taxes
  6. Landlord claims (up to three months in rent arrears and in accelerated rent)

8) Unsecured creditors

If any assets are left in the bankrupt estate after all of the above-mentioned super-priority charges have been made, unsecured creditors can begin to seek their share of the claim.

Professional advice can help creditors understand their rank and exercise their right to repayment within the legal parameters of a bankruptcy.

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