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Whenever an individual or corporate debtor files bankruptcy, federal law demands that they submit a list of all the creditors to whom they owe money. Some creditors such as the IRS and child-support recipients are among the groups that get preferences from the bankruptcy courts when determining what share of the debtor’s remaining assets they will be entitled to receive.
Other types of creditors will likely have to take what many refer to euphemistically as a “haircut." Generally, the courts also give strong preference as well to the holder of a mortgage on any real estate owned by the debtor filing for bankruptcy. This type of secured creditor which maintains a security interest in the property when they finance a loan will take a much smaller haircut than those creditors who did not make a loan with a security agreement. Creditors such as landlords, shareholders, utilities and vendors will need to negotiate their share from what is left of the debtor’s assets after larger shares go to the secured creditors. The arcane rules of the bankruptcy process and competing interests of those entitled to limited assets require that creditors hire bankruptcy attorneys to negotiate the best payout for each of them.