Question

Michone lost her job and ended up deep in debt after she was arrested for causing a car accident while she was drinking and driving. The victim in the car accident sued Michone and was awarded $40,000 in damages. Michone declared bankruptcy before she paid the victim the amount of the judgement. A couple of years before Michone declared bankruptcy, she purchased a house with a mortgage of $500,000. At the time of her bankruptcy, the house sold for $400,000. In addition, Michone was behind in her property taxes in the amount of $8,000. The attorney’s fees for the bankruptcy were $4,000. She also owed back child support in the amount of $5,000. List Michone’s creditors and the priority of their claims. In addition, if Michone only had $10,000 for the creditors listed in this discussion forum, how much would each of the creditors receive?

Answer 1

Michone's creditors and the priority of their claims are listed. If Michone only has $10,000 for the creditors, the amount each creditor would receive is calculated.

Step-by-step explanation:

Michone's creditors and the priority of their claims are as follows:

1. The victim in the car accident - $40,000 (Priority: Unsecured creditor)
2. Attorney's fees for the bankruptcy - $4,000 (Priority: Administrative expenses)
3. Back child support - $5,000 (Priority: Domestic support obligations)
4. Property taxes owed - $8,000 (Priority: Secured claim)
5. Mortgage loan on the house - $400,000 (Priority: Secured claim)

If Michone only has $10,000 to distribute among the creditors, each creditor would receive:

1. The victim in the car accident - $5,000
2. Attorney's fees for the bankruptcy - $4,000
3. Back child support - $1,000
4. Property taxes owed - $0
5. Mortgage loan on the house - $0

Answer 2

Michone's creditors (listed in order of priority):

1. bank = $500,000 mortgage (secured loan)
2. child support = $5,000 (priority class of unsecured creditors)
3. legal fees = $4,000 (second class of unsecured creditors)
4. State government* = property taxes for $8,000 (eighth class of unsecured creditors, but property taxes are always collected after a property is sold either by foreclosure or by court order). Even if the new buyer didn't know anything about the delinquent property taxes, he/she is responsible for paying them after the sale is made and it cannot be avoided.
5. car accident victim = $40,000 (tenth class of unsecured creditor)

*Generally taxes owed are a lower class of priority unsecured creditors, but taxes never disappear. In this case, the property taxes are going to be paid by whoever bought the house or the bank in case the house was foreclosed. Michone will not pay them, but someone else will.

Assuming that Michone only had $10,000 left after selling the house (both property taxes and mortgage are paid for), she will need to pay child support first. Child support and alimony payments always have the top priority.

Then with the remaining $5,000 administrative and legal fees will be paid, meaning that the attorney fees will be paid first. The car accident victim will receive only $1,000.