An administrative expense is a cost that arises after you file for bankruptcy that relates to the management of your bankruptcy case. For instance, if you have a vintage car that you must give up, and the bankruptcy trustee—the person in charge of overseeing the case—wants to determine its value by having it appraised before selling it, the cost of the appraisal would be an administrative expense. Other administrative expenses might include the amount paid to hire a real estate agent to sell your house or the fees billed by an accountant or an attorney retained by the trustee.
Administrative expenses receive priority over most other debts, which means that if money is available to pay creditors, the trustee will pay administrative expenses before most other obligations. In this article, you'll learn more about paying priority administrative expenses in bankruptcy.
(You can find out more about trustee's responsibilities on Nolo's The Bankruptcy Trustee topic page.)
The only way a debt can be paid in a bankruptcy case is when money is available to pay it—and while money isn't always available, when it is, the case is called an "asset case." In a Chapter 7 bankruptcy, a case is an asset case if the bankruptcy filer has nonexempt property (property that the filer can't keep) that the trustee liquidates (sells) for the benefit of the creditors. By contrast, a Chapter 13 matter is always an asset case because the filer must pay money into a repayment plan for three to five years.
When funds are available to pay creditors, the trustee satisfies the debt in an orderly fashion. Under bankruptcy law, the trustee must pay debt according to the "priority," or ranking of the particular debt. The higher the debt's payment priority, the more likely the creditor will get paid. Here's how it works.
The first job of the bankruptcy trustee is to determine whether a creditor's claim is a secured debt (a debt guaranteed by property, such as a house or car) or an unsecured debt (an obligation that isn't secured by property). This characterization is important because the trustee can't use secured funds to pay unsecured debts without first paying off the secured debt. In other words, if the trustee sells a house, the trustee must pay the mortgage secured by the home first. The trustee cannot use the proceeds from the house to pay an unsecured claim, such as your credit card debt, unless funds are left over after fully paying the mortgage.
If money is available to pay unsecured debts, the trustee pays unsecured creditors according to the priority of the particular debt. For instance, child and spousal support arrearages have the highest priority status in bankruptcy and therefore, the trustee will pay these debts first. However, if the trustee incurred administrative expenses while procuring funds to pay child or spousal support, those administrative expenses are paid before the support obligation.
If there aren't any first priority debts, or if funds remain after paying off the first priority debts, the trustee will move to the second priority debts—all other administrative expenses. The trustee will satisfy the administrative expenses before paying debts lower in priority, such as unpaid taxes. On the very bottom of the heap are your credit card balances, medical bills, and personal loans. They receive no priority at all, which means that the trustee won't pay them unless all priority unsecured debts are satisfied first.
One of the trustee's duties is to preserve the value of your property for the benefit of the creditors until the property sale date, and there is no limit to the type of goods that can fall into the trustee's hands. For instance, a trustee will regularly receive timeshares in Mexico. However, the trustee could just as easily become responsible for a rare (and valuable) tuft of bamboo growing in a debtor's backyard, or even a starving herd of tame pigs. And if the trustee must purchase pig food before selling the pink bundles to the local pet store (at a discount), it's likely that the trustee can claim the cost of food as an administrative expense.
In most situations, the trustee will incur appraisal and sale-related expenses, but a trustee can incur other types of professional administrative expenses, too. For example, the trustee might hire an accountant to comb through the books of a debtor suspected of hiding assets, or hire an attorney to protect an asset if someone files a lawsuit claiming an ownership interest in property that's part of the bankruptcy estate. Here are a few other examples:
The filing fee that you pay when you file your case is also an administrative expense. However, the fees are distributed automatically, not as a part of the priority ranking system. For example, the Chapter 7 bankruptcy trustee automatically receives $60 of the fee to administer your case.