Bankruptcy Forms: Filing Bankruptcy Chapter 7 Bankruptcy Software Chapter 13

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TITLE 11–BANKRUPTCY

CHAPTER 7–LIQUIDATION

Sub Chapter II – Collection, Liquidation and Distribution of the Estate

Sec. 726. Distribution of property of the estate

    (a) Except as provided in section 510 of this title, property of the 
estate shall be distributed--
        (1) first, in payment of claims of the kind specified in, and in 
    the order specified in, section 507 of this title, proof of which is 
    timely filed under section 501 of this title or tardily filed before 
    the date on which the trustee commences distribution under this 
    section;
        (2) second, in payment of any allowed unsecured claim, other 
    than a claim of a kind specified in paragraph (1), (3), or (4) of 
    this subsection, proof of which is--
            (A) timely filed under section 501(a) of this title;
            (B) timely filed under section 501(b) or 501(c) of this 
        title; or
            (C) tardily filed under section 501(a) of this title, if--
                (i) the creditor that holds such claim did not have 
            notice or actual knowledge of the case in time for timely 
            filing of a proof of such claim under section 501(a) of this 
            title; and
                (ii) proof of such claim is filed in time to permit 
            payment of such claim;

        (3) third, in payment of any allowed unsecured claim proof of 
    which is tardily filed under section 501(a) of this title, other 
    than a claim of the kind specified in paragraph (2)(C) of this 
    subsection;
        (4) fourth, in payment of any allowed claim, whether secured or 
    unsecured, for any fine, penalty, or forfeiture, or for multiple, 
    exemplary, or punitive damages, arising before the earlier of the 
    order for relief or the appointment of a trustee, to the extent that 
    such fine, penalty, forfeiture, or damages are not compensation for 
    actual pecuniary loss suffered by the holder of such claim;
        (5) fifth, in payment of interest at the legal rate from the 
    date of the filing of the petition, on any claim paid under 
    paragraph (1), (2), (3), or (4) of this subsection; and
        (6) sixth, to the debtor.

    (b) Payment on claims of a kind specified in paragraph (1), (2), 
(3), (4), (5), (6), (7), or (8) of section 507(a) of this title, or in 
paragraph (2), (3), (4), or (5) of subsection (a) of this section, shall 
be made pro rata among claims of the kind specified in each such 
particular paragraph, except that in a case that has been converted to 
this chapter under section 1009,\1\ 1112, 1208, or 1307 of this title, a 
claim allowed under section 503(b) of this title incurred under this 
chapter after such conversion has priority over a claim allowed under 
section 503(b) of this title incurred under any other chapter of this 
title or under this chapter before such conversion and over any expenses 
of a custodian superseded under section 543 of this title.
---------------------------------------------------------------------------
    \1\ So in original. This title does not contain a section 1009.
---------------------------------------------------------------------------
    (c) Notwithstanding subsections (a) and (b) of this section, if 
there is property of the kind specified in section 541(a)(2) of this 
title, or proceeds of such property, in the estate, such property or 
proceeds shall be segregated from other property of the estate, and such 
property or proceeds and other property of the estate shall be 
distributed as follows:
        (1) Claims allowed under section 503 of this title shall be paid 
    either from property of the kind specified in section 541(a)(2) of 
    this title, or from other property of the estate, as the interest of 
    justice requires.
        (2) Allowed claims, other than claims allowed under section 503 
    of this title, shall be paid in the order specified in subsection 
    (a) of this section, and, with respect to claims of a kind specified 
    in a particular paragraph of section 507 of this title or subsection 
    (a) of this section, in the following order and manner:
            (A) First, community claims against the debtor or the 
        debtor's spouse shall be paid from property of the kind 
        specified in section 541(a)(2) of this title, except to the 
        extent that such property is solely liable for debts of the 
        debtor.
            (B) Second, to the extent that community claims against the 
        debtor are not paid under subparagraph (A) of this paragraph, 
        such community claims shall be paid from property of the kind 
        specified in section 541(a)(2) of this title that is solely 
        liable for debts of the debtor.
            (C) Third, to the extent that all claims against the debtor 
        including community claims against the debtor are not paid under 
        subparagraph (A) or (B) of this paragraph such claims shall be 
        paid from property of the estate other than property of the kind 
        specified in section 541(a)(2) of this title.
            (D) Fourth, to the extent that community claims against the 
        debtor or the debtor's spouse are not paid under subparagraph 
        (A), (B), or (C) of this paragraph, such claims shall be paid 
        from all remaining property of the estate.

(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2608; Pub. L. 98-353, title III, 
Sec. 479, July 10, 1984, 98 Stat. 381; Pub. L. 99-554, title II, 
Secs. 257(r), 283(s), Oct. 27, 1986, 100 Stat. 3115, 3118; Pub. L. 103-
394, title II, Sec. 213(b), title III, Sec. 304(h)(5), title V, 
Sec. 501(d)(24), Oct. 22, 1994, 108 Stat. 4126, 4134, 4146.)


                      Historical and Revision Notes

                         legislative statements

    Section 726(a)(4) adopts a provision contained in the Senate 
amendment subordinating prepetition penalties and penalties arising in 
the involuntary gap period to the extent the penalties are not 
compensation for actual pecuniary laws.
    The House amendment deletes a provision following section 726(a)(6) 
of the Senate amendment providing that the term ``claim'' includes 
interest due owed before the date of the filing of the petition as 
unnecessary since a right to payment for interest due is a right to 
payment which is within the definition of ``claim'' in section 101(4) of 
the House amendment.


                        senate report no. 95-989

    This section is the general distribution section for liquidation 
cases. It dictates the order in which distribution of property of the 
estate, which has usually been reduced to money by the trustee under the 
requirements of section 704(1).
    First, property is distributed among priority claimants, as 
determined by section 507, and in the order prescribed by section 507. 
Second, distribution is to general unsecured creditors. This class 
excludes priority creditors and the two classes of subordinated 
creditors specified below. The provision is written to permit 
distribution to creditors that tardily file claims if their tardiness 
was due to lack of notice or knowledge of the case. Though it is in the 
interest of the estate to encourage timely filing, when tardy filing is 
not the result of a failure to act by the creditor, the normal 
subordination penalty should not apply. Third distribution is to general 
unsecured creditors who tardily file. Fourth distribution is to holders 
of fine, penalty, forfeiture, or multiple, punitive, or exemplary damage 
claims. More of these claims are disallowed entirely under present law. 
They are simply subordinated here.
    Paragraph (4) provides that punitive penalties, including 
prepetition tax penalties, are subordinated to the payment of all other 
classes of claims, except claims for interest accruing during the case. 
In effect, these penalties are payable out of the estate's assets only 
if and to the extent that a surplus of assets would otherwise remain at 
the close of the case for distribution back to the debtor.
    Paragraph (5) provides that postpetition interest on prepetition 
claims is also to be paid to the creditor in a subordinated position. 
Like prepetition penalties, such interest will be paid from the estate 
only if and to the extent that a surplus of assets would otherwise 
remain for return to the debtor at the close of the case.
    This section also specifies that interest accrued on all claims 
(including priority and nonpriority tax claims) which accrued before the 
date of the filing of the title 11 petition is to be paid in the same 
order of distribution of the estate's assets as the principal amount of 
the related claims.
    Any surplus is paid to the debtor under paragraph (6).
    Subsection (b) follows current law. It specifies that claims within 
a particular class are to be paid pro rata. This provision will apply, 
of course, only when there are inadequate funds to pay the holders of 
claims of a particular class in full. The exception found in the 
section, which also follows current law, specifies that liquidation 
administrative expenses are to be paid ahead of reorganization 
administrative expenses if the case has been converted from a 
reorganization case to a liquidation case, or from an individual 
repayment plan case to a liquidation case.
    Subsection (c) governs distributions in cases in which there is 
community property and other property of the estate. The section 
requires the two kinds of property to be segregated. The distribution is 
as follows: First, administrative expenses are to be paid, as the court 
determines on any reasonable equitable basis, from both kinds of 
property. The court will divide administrative expenses according to 
such factors as the amount of each kind of property in the estate, the 
cost of preservation and liquidation of each kind of property, and 
whether any particular administrative expenses are attributable to one 
kind of property or the other. Second, claims are to be paid as provided 
under subsection (a) (the normal liquidation case distribution rules) in 
the following order and manner: First, community claims against the 
debtor or the debtor's spouse are paid from community property, except 
such as is liable solely for the debts of the debtor.
    Second, community claims against the debtor, to the extent not paid 
under the first provision, are paid from community property that is 
solely liable for the debts of the debtor. Third, community claims, to 
the extent they remain unpaid, and all other claims against the debtor, 
are paid from noncommunity property. Fourth, if any community claims 
against the debtor or the debtor's spouse remain unpaid, they are paid 
from whatever property remains in the estate. This would occur if 
community claims against the debtor's spouse are large in amount and 
most of the estate's property is property solely liable, under 
nonbankruptcy law, for debts of the debtor.
    The marshalling rules in this section apply only to property of the 
estate. However, they will provide a guide to the courts in the 
interpretation of proposed 11 U.S.C. 725, relating to distribution of 
collateral, in cases in which there is community property. If a secured 
creditor has a lien on both community and noncommunity property, the 
marshalling rules here--by analogy would dictate that the creditor be 
satisfied first out of community property, and then out of separate 
property.


                               Amendments

    1994--Subsec. (a)(1). Pub. L. 103-394, Sec. 213(b), inserted before 
semicolon at end ``, proof of which is timely filed under section 501 of 
this title or tardily filed before the date on which the trustee 
commences distribution under this section''.
    Subsec. (b). Pub. L. 103-394, Secs. 304(h)(5), 501(d)(24), 
substituted ``, (7), or (8)'' for ``or (7)'' and ``chapter under section 
1009, 1112,'' for ``chapter under section 1112''.
    1986--Subsec. (b). Pub. L. 99-554, Sec. 283(s), inserted reference 
to par. (7) of section 507(a) of this title.
    Pub. L. 99-554, Sec. 257(r), inserted reference to section 1208 of 
this title.
    1984--Subsec. (b). Pub. L. 98-353, Sec. 479(a), substituted ``each 
such particular paragraph'' for ``a particular paragraph'', ``a claim 
allowed under section 503(b) of this title'' for ``administrative 
expenses'' in two places, and ``has priority over'' for ``have priority 
over''.
    Subsec. (c)(1). Pub. L. 98-353, Sec. 479(b)(1), substituted ``Claims 
allowed under section 503 of this title'' for ``Administrative 
expenses''.
    Subsec. (c)(2). Pub. L. 98-353, Sec. 479(b)(2), substituted 
``Allowed claims, other than claims allowed under section 503 of this 
title,'' for ``Claims other than for administrative expenses''.


                    Effective Date of 1994 Amendment

    Amendment by Pub. L. 103-394 effective Oct. 22, 1994, and not 
applicable with respect to cases commenced under this title before Oct. 
22, 1994, see section 702 of Pub. L. 103-394, set out as a note under 
section 101 of this title.


                    Effective Date of 1986 Amendment

    Amendment by section 257 of Pub. L. 99-554 effective 30 days after 
Oct. 27, 1986, but not applicable to cases commenced under this title 
before that date, see section 302(a), (c)(1) of Pub. L. 99-554, set out 
as a note under section 581 of Title 28, Judiciary and Judicial 
Procedure.
    Amendment by section 283 of Pub. L. 99-554 effective 30 days after 
Oct. 27, 1986, see section 302(a) of Pub. L. 99-554.


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-353 effective with respect to cases filed 90 
days after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out 
as a note under section 101 of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 106, 347, 502, 702, 705, 
723, 724, 725, 752, 766 of this title; title 15 section 78fff; title 20 
section 1087-2.



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