Different categories of creditors
Do all creditors have the same standing in the bankruptcy?
No - there are different categories of creditors and their standing in a bankruptcy depends on whether they hold security for their debt or not. Once a person has been made bankrupt, the petitioning creditors unsecured debt ranks equally along with all the other unsecured creditors.
What is a secured creditor?
A secured creditor holds security such as a mortgage or judgment against a property owned by the person made bankrupt.
The secured creditor has three options:
- He/she can rely upon his/her security and sell the asset comprising the security. He/She must account to the Official Assignee in respect of the sale, providing him with copy of mortgage / charge and may claim for any amount (if any) still owed following the sale in the bankruptcy.
- He/she can abandon their security and make a claim as an unsecured creditor for his/her entire debt.
- He/she can value their security and claim in the bankruptcy for the unsecured portion of their debt (the amount owed in excess of what the security is worth).
There may be a number of creditors holding security against a single property. For example there may be in the first instance a bank which has a legal mortgage over the property which is paid first from sale proceeds, thereafter there may be a judgement mortgagee who has registered a judgement against the property and only if there is a surplus in equity after payment of both debts, is there anything remaining for the Official Assignee.
What is a preferential creditor?
A preferential creditor is a creditor whose debts have priority for payment before other unsecured creditors. These debts include taxes, rates and certain kinds of employee claims and benefits for certain periods.
What is an unsecured creditor?
An unsecured creditor does not hold any security on property of a bankrupt
for example, trade creditors and other business debts. They rank equally in
entitlement with other unsecured creditors for payment, after secured creditors
and preferential creditors.