Bankruptcy Creditors

Bankruptcy secured creditors whose security interests survive the commencement of the case may look to the property that is the subject of their security interests, after obtaining permission from the court (in the form of relief from the automatic stay). Security interests, created by what are called secured transactions, are liens on the property of a debtor.

Bankruptcy unsecured creditors are generally divided into two classes: unsecured priority creditors and general unsecured creditors. Unsecured priority creditors are further subdivided into classes as described in the law. In some cases the assets of the estate are insufficient to pay all priority unsecured creditors in full; in such cases the general unsecured creditors receive nothing.

Because of the priority and rank ordering feature of bankruptcy law, debtors sometimes improperly collude with others (who may be related to the debtor) to prefer them, by for example granting them a security interest in otherwised unpledged assets. For this reason, the bankruptcy trustee is permitted to reverse certain transactions of the debtor within period of time prior to the date of bankruptcy filing. The time period varies depending on the relationship of the parties to the debtor and the nature of the transaction.

Also, the Bankruptcy Trustee may reject certain executory contracts and unexpired leases (see 11 U.S.C. § 365). For bankruptcy purposes, a contract is generally considered "executory" where both parties to the contract have not yet fully performed a material obligation.

If the Trustee (or debtor in possession, in many chapter 11 cases) rejects a contract, the debtor's bankruptcy estate is subject for ordinary contract law damages; but the damage obligation is generally treated as an unsecured claim.