Order of settlement in bankruptcy proceedings

In bankruptcy proceedings, the order of debt collection is not based on chance or subjective judgment, but on the strictly regulated rules of the Bankruptcy Act. Proper application of these rules is essential to protect the rights of all creditors, preserve legal certainty, and ensure fair distribution from the bankruptcy estate.

There are four types of creditors in bankruptcy proceedings: bankruptcy creditors, creditors of the bankruptcy estate, secured creditors, and creditors with a right of separation.

Creditors of the bankruptcy estate

The first to be paid from the bankruptcy estate are the costs of the bankruptcy proceedings and other obligations of the bankruptcy estate.

Creditors of the bankruptcy estate are those whose claims arise after the opening of bankruptcy proceedings and relate to the costs of the proceedings and other estate obligations. Costs of the bankruptcy proceedings include: court fees, wage claims exceeding three unpaid salaries but capped at the amount of three minimum wages in the Republic of Croatia, fees and expenses of the interim bankruptcy trustee and members of the creditors’ committee and other costs prescribed by the Bankruptcy Act or other laws to be paid as bankruptcy costs.

It is important to note that other obligations of the bankruptcy estate that are not considered procedural costs must be settled by the bankruptcy trustee according to their due dates. These include: liabilities incurred through the actions of the bankruptcy trustee or through the management, liquidation, and distribution of the estate, attorneys’ fees for services provided during the six months prior to the opening of proceedings, provided such services relate to the protection and realization of rights included in the estate, obligations under bilateral contracts that must be fulfilled for the benefit of the estate or continue post-commencement, obligations based on unjust enrichment that enter into the estate, and employee claims that arise after the bankruptcy proceedings are initiated.

Bankruptcy creditors

Once the creditors of the bankruptcy estate are paid, the settlement of bankruptcy creditors follows.

Bankruptcy creditors are personal creditors of the debtor who, at the time the proceedings are opened, have property-based claims against the debtor.

Bankruptcy creditors are divided into payment classes according to the nature of their claims. Creditors in a lower payment class may only be paid once creditors in a higher class have been satisfied in full. Creditors within the same class are paid proportionally to the size of their claims.

Claims of the first higher payment class include: claims of workers and former workers arising from employment before the opening of proceedings, claims of the government, institutes, or funds for the legally defined portion of salary costs, severance pay up to the amount prescribed by law or collective agreement and claims for compensation due to work-related injuries or occupational diseases.

Claims of the second higher payment class include all other claims not listed in the lower payment classes.

Following the higher payment classes, the lower payment classes are settled in the following order: interest on bankruptcy creditors’ claims from the date of the opening of the proceedings, individual costs incurred by creditors for participating in the proceedings, fines imposed for criminal or misdemeanor offenses and related procedural costs, claims for gratuitous services or donations made by the debtor and claims for repayment of shareholder loans or similar equity-substituting loans.

Secured and creditors with a right of separation

In the context of the order of settlement in bankruptcy proceedings, it is important to address secured and seperate creditors, who are not paid from the general bankruptcy estate.

Creditors with a right of separation hold a lien or other security interest on an asset or right that is registered in a public registry (e.g., land register, ship register, intellectual property register). This creditor has the right to separate and preferential satisfaction from that specific asset or to its liquidation proceeds. The secured right entitles the creditor to separate and priority satisfaction of the claim secured by that right during the bankruptcy proceedings.

A seperate creditor is one who can prove, based on a property or personal right, that a certain item does not belong to the bankruptcy estate. Separation creditors are not bankruptcy creditors; their right to claim property is determined according to rules governing such rights outside of the bankruptcy process.