What’s an Administrative Claim? And Why Should I Want One?

The U.S. bankruptcy system strives to create the maximum repayment possible for creditors.  In some cases, bankruptcy companies can be restructured and made profitable again.  But, in order to do this, the bankrupt companies need to keep operating while their bankruptcy case is proceeding in court.

Being in the midst of a bankruptcy proceeding can be a major reputational blow to a company.  Suddenly its suppliers become worried about its ability to pay for more goods and services because there is already a large queue of other creditors vying for a slice of the company.  As a result, the first instinct of many suppliers is to cut off bankrupt companies in order to reduce the supplier’s own risk.  The result is a self-fulfilling prophecy: if the suppliers cut off the bankrupt company, then indeed it will stay bankrupt because it no longer has products to sell.  Part of the solution to this downward spiral problem is the Administrative Claim.

An Administrative Claim is used to describe an obligation taken on by a debtor after the bankruptcy case has already been filed.  The need for Administrative Claims often occurs in  Chapter 11 bankruptcy cases, where a business is in the process of restructuring.  Despite having filed for bankruptcy, the court wants others to continue to do business with the debtor so it can get back on its feet and repay creditors.  A key step in helping the company get back on its feet is to influence suppliers and partners to continue to do business with the bankrupt company.  To create this incentive for suppliers to continue business, the Bankruptcy Code creates a special category for everyday business transactions with the debtor after the bankruptcy has been filed: the “Administrative Claim.”

If the bankrupt company does not timely pay for its everyday business transactions initiated after the bankruptcy case is filed, then those owed money for such transactions are given higher priority than many other claims in the bankruptcy.  Common examples of expenses that qualify under Administrative Claims include salaries, court costs, and taxes.

Depending on the facts of the money you are owed, it may be possible to bifurcate your claim and get the priority status benefits of having a portion of it deemed as a higher priority Administrative Claim.  While it sounds complicated, that’s exactly our area of expertise at Proxifile and our partner law firm, Enumero Law.  We are experts at studying the facts of your claim to see how we can get it prioritized.  In fact, we believe so strongly in our ability to maximize your recovery that we are willing to bet our fees on doing so.

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