An order of priority to receive distributions from amounts available to meet unsecured claims has been established by the Act. Each class must be paid in full or provided for before any amount is paid to the next lower class. When the amount is inadequate to pay all claims of a given class, the amount is distributed on a pro rata basis within that class. When the amount is sufficient to pay the claims of all classes, which is highly unlikely, the excess amount is returned to the debtor. The order of priority for allowed unsecured claims is as follows:
Class 1—Expenses to administer the estate. Those who administer the estate should be assured of payment; otherwise, competent attorneys and accountants would not be willing to participate.
Class 2—Debts incurred after the commencement of a case of involuntary bankruptcy but before the order for relief or appointment of a trustee. These items, referred to as “gap” creditors, are granted priority in order to permit the business to carry on its operations during the period of legal proceedings.
Class 3—Wages (salaries or commissions) up to $4,000 per individual, earned within 90 days before the filing of the petition or the cessation of the debtor’s business, whichever occurs first.
Class 4—Unpaid contributions to employee benefit plans, arising from services performed up to 180 days prior to filing the petition, to the extent of $4,000 per employee covered by the plan.
Class 5—Deposits up to $1,800 each for goods or services never received from the debtor.
Class 6—Tax claims of a governmental unit. These taxes are nondischargeable (i.e., they still must be met by the debtor after the termination of the case).
Class 7—Claims of general creditors not granted priority. All remaining unsecured claims fall into this category.
Code states that the court will approve the plan only if the value of the property to be distributed on account of each allowed unsecured claim is not less than the amount that would be paid. It is important to note that although the goal of a liquidation is to discharge the debts, certain debts are not dischargeable. For example, certain taxes, fines, and/or penalties are nondischargeable.