Priority of claims in a Commercial Bankruptcy Proceeding: Who gets paid first?

Executive Summary:

• The Commercial Bankruptcy Law establishes a strict order of priority for payments that does not depend on the time when the credit is presented, but on its nature, giving priority first to workers, then to guaranteed credits and finally to common and subordinated creditors.

• Understanding this hierarchy allows for anticipating recovery scenarios, designing negotiation strategies, and detecting asset acquisition opportunities within the insolvency process, with greater legal and financial certainty.

When a company enters bankruptcy proceedings, not only is its viability analyzed and a restructuring sought during the conciliation stage, but one of the most important questions for all involved also arises: in what order will the recognized debts be paid?

The Bankruptcy Law establishes a precise structure for determining which creditors have priority over others. This order is not arbitrary: it seeks to protect labor rights, ensure the orderly continuity of the proceedings, and guarantee fair treatment among the different types of creditors.

Below, we present a clear guide that explains who gets paid first, why, and what type of loans make up each category.

1. Claims against the estate: ensuring the continuity of the proceedings

These are the essential expenses for the company to continue operating normally during the bankruptcy proceedings and for the legal process to function correctly.

They include, for example:

• Back wages and compensation protected by the Constitution (up to one year prior to the declaration).
• Salaries generated within the competition.
• Rent, electricity and essential services.
• Fees of the specialist conciliator or trustee.
• Asset maintenance expenses.
• Authorized financing to provide liquidity (as a DIP Financing).

These loans are paid first because they allow the bankruptcy process to exist and move forward.

2. Singularly privileged creditors: exceptional cases

These are very specific assumptions, more common when the merchant is a natural person.

These include expenses such as:

• Last illness or funeral of the merchant.

Although infrequent in companies, the law gives them preference.

3. Creditors with real security:

If a creditor has a mortgage or pledge, their right falls on a specific asset.

Typical examples:

• Banks with mortgages on real estate or plants.
• Pledge on machinery or inventory.
• Factoring with specific guarantee.

This group charges from the value of the guaranteed asset; if the value is insufficient, the difference becomes a common credit.

4. Non-constitutional labor credits and tax credits

After covering the immediate constitutional preference, other labor portions and all tax credits remain.
Include:

• Non-preferential compensation or benefits.
• Tax obligations to the SAT (Mexican Tax Administration Service), IMSS (Mexican Social Security Institute), Infonavit (National Workers' Housing Fund Institute), ISR/IVA (Income Tax/Value Added Tax), and related charges. If the tax credit is secured by collateral, payment is made from that collateral first.

5. Creditors with special privilege: legal rights over certain assets

The law recognizes certain privileges without the need for a mortgage or pledge.

Examples:

• Carrier with rights over goods for unpaid freight.
• Repairer or custodian with right of retention.
• Landlord with privileges over fruits or improvements in specific cases.

They have priority over ordinary creditors.

6. Common creditors:

These are all those who do not have a guarantee or special privilege.

Include:

• Suppliers without warranty.
• Landlords without real guarantee.
• Customers or contractors with positive balances.
• Sentences without guarantee.

This group charges on a pro rata basis, that is, proportionally from what remains after paying the preferred shares.

7. Subordinated creditors: the last in line

This includes those who agreed to be paid until the end or have a special relationship with the company that leads the law to place them at the end.
Examples:

• Loans from partners or related parties.
• Mezzanine or junior debt with subordination clause.

From the above, it can be seen that the way the Bankruptcy Law organizes the payment of debts is not arbitrary. It responds to principles of labor protection, legal certainty, and fairness among creditors. Some key elements for understanding how this system operates are the following:

• The timing of a creditor's request does not alter their place in the queue. During the conciliation stage, there are three procedural opportunities to request recognition of a claim, but payment priority is determined by the nature of the claim, not by the date it is filed.
• The order of precedence is strict and sequential. One group must be covered in its entirety before moving on to the next; there are no skips or exceptions.
• Workers with constitutional priority are at the top of the hierarchy. They are paid before any other creditor, even before those with a mortgage or lien.
• Creditors with secured loans are only paid up to the value of the encumbered asset. If there is a shortfall, it becomes a regular debt.
• Unsecured creditors receive their payment proportionally. That is, the remaining balance is distributed among them according to a set schedule. pro rata.

In insolvency proceedings, understanding the order of payments is key, as this allows for anticipating financial scenarios and legal risks within a commercial insolvency proceeding.

This information is especially useful for:

Evaluate financial, tax, and legal impacts before participating as a creditor or buyer.

• Estimate the real possibilities of recovering a loan.
• Define negotiation strategies, whether with the Conciliator, the Trustee, or with other creditors.
• Identify asset acquisition opportunities within the insolvency process.
• Evaluate financial, tax, and legal impacts before participating as a creditor or buyer.