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Who gets paid in bankruptcy? SCOTUS case could change the normal order.

A case that is set to be argued at the Supreme Court of the United States (SCOTUS) could have major implications in the bankruptcy world. The case involves a company that filed for bankruptcy shortly after a buyout.

Financial difficulties led the company, a trucking business, to issue massive layoffs. The layoffs were allegedly not in line with state and federal laws, which require that the workers get 60 days notice before a massive layoff is finalized. The workers sued for lost wages, but before they received payment from the bankruptcy proceeding the company settled with other, unsecured lenders first.

As a result, nothing was left for the former employees.

Queue the Supreme Court. The workers are arguing that the move to pay unsecured creditors before they received payment failed to follow the priority rule. Although not officially a law, as noted in a recent piece by the New York Times, the priority rule has been used to help establish what is "fair and equitable" for decades in similar cases.

What is the priority rule? The case is shaking up what has been considered the normal order of payment in a bankruptcy case for decades, known as the priority rule.

Generally, the first to get paid are the lenders who secure the debt with assets owned by the company. After that, professionals that help with the bankruptcy normally receive payment followed by employees. Those who hold shares or equity in the company are generally slotted to fall last on the list.

In this case, those who should fall last for payment moved up in the order of priority, leaving noting behind for other creditors who would normally receive payment before the bottom tier.

Why is this case a big deal? Critics of the settlement note that allowing priority to be rejected is dangerous for all involved. Such a move could create a culture of bullying where two creditors team up to squeeze out another.

What will SCOTUS decide? At this time, it is hard to predict. The United States Court of Appeals for the Third Circuit held in favor of the agreement, explaining that it provided the "least bad alternative."

If the settlement had not moved forward, the court stated, secured creditors would have decimated any potential funds. As a result, only the secured creditors would get payment. With this settlement, both the secured and unsecured creditors received some level of payment.

What does this mean for creditors? If SCOTUS allows the change, it could impact the progression of bankruptcy cases in the future. Creditors could find their cases require a higher degree of negotiating with other creditors in an effort to receive payment. This highlights the difficulties creditors can face when navigating a bankruptcy face.

The path can be eased. Experienced legal counsel can protect your rights.

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