What is an Administrative Debt in Bankruptcy?
Bankruptcy cases involve many different forms of debts, which are classified in particular ways. Those classifications impact how such debts are repaid, and in reorganization bankruptcy cases, whether those debts must be repaid in full or may be eligible for discharge. In general, whether you are filing for personal bankruptcy or your business is filing a corporate bankruptcy case, debts are classified as secured or unsecured debts. Secured debts are those with collateral (such as a motor vehicle or a home that can be repossessed when the debtor does not pay), while unsecured debts are not backed by collateral. Debts are also classified either as priority debts that the law requires to be paid before other types of debts, and as nonpriority debts that are typically paid last and may be eligible for discharge.
Outside these categories, if you are filing for bankruptcy, you might also come across references to administrative debt, which is also sometimes described as administrative expenses. What does this mean, and where does it fit in with the other types of debt?
Defining Administrative Debt
Administrative debt, or administrative expenses, refers to a specific category of priority debt created by Section 507(a)(1) of the United States Bankruptcy Code. It is a term that refers specifically to a type of priority debt that is created when an individual or entity provides services or goods to the bankruptcy estate during the process.
Such administrative expenses, according to the Cornell Legal Information institute, “have the highest priority among creditor claims in bankruptcy” and typically must be paid first. In other words, administrative debt is a type of priority debt, and it has the greatest priority of any priority debts.
What Counts As Administrative Debt?
In order to determine whether a debt should be classified as administrative debt (or as another type of priority debt instead), the bankruptcy court will usually apply a two-part test to make this determination:
- Did the expense arise out of a post-petition translation between the creditor and debtor?; and
- Was the expense “actual and necessary” to preserve the bankruptcy estate?
If the answer to both of those questions is yes, then the debt can typically be classified as an administrative debt or administrative expense. Common examples of administrative expenses include trustee fees, attorney fees, and other professional fees that the court has authorized.
Contact Our West Palm Beach Bankruptcy Attorneys for Assistance with Your Debts and Your Bankruptcy Case
If you have any questions about priority versus nonpriority debt in your bankruptcy case, or other inquiries about the order in which debts, as well as their amounts, will need to be repaid in a reorganization bankruptcy under Chapter 11 or Chapter 13, you should seek advice from a bankruptcy attorney who can assist you. An experienced West Palm Beach bankruptcy lawyer at Kelley Kaplan Delaney & Eller, PLLC can talk with you today to learn more about your financial circumstances and to provide you with more information about how your debts will be handled in your Florida bankruptcy case. Contact our firm today to find out more about how we can help you.
Source:
law.cornell.edu/uscode/text/11
