Treatment of Customer Deposits as Priority Claims in Bankruptcy – 507(a)(7)
Customer Deposit Priority:
11 U.S.C. § 507(a)(7) provides the priority for Customer Deposits: “The following expenses and claims have priority in the following order: … (7) Seventh, allowed unsecured claims of individuals, to the extent of $2,600 for each such individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.
Translation of the Customer Deposit Priority Statute – 11 U.S.C. § 507(a)(7):
If you made a deposit on consumer goods or services, your claim is paid after secured creditor claims (to the extent of their collateral), the lawyers and other professionals in the case, some of the employees’ last wages earned, but before the taxes and other unsecured claims. It’s not a bad priority at all.
Recovery on Customer Deposits
Bankruptcy Code Section 507(a)(7) establishes a priority for unsecured claims of individuals arising from Customer Deposits towards the purchase of goods or services that were not delivered up to a maximum of $2,600. The remaining portion of the un-refunded deposit would become a general unsecured claim. Consumers owed deposits are only paid after all of the secured creditors and administrative expenses of the bankruptcy (such as bankruptcy lawyers’ fees) are paid. As priority creditors, holders of deposits would be paid up to $2,600 before any general unsecured obligations of the retailer are satisfied.
Deposits Paid by Credit Card
It is recommended that consumers pay deposits to retailers by using credit cards rather than by writing a check or paying cash. The Fair Credit Billing Act allows consumers to dispute charges with the credit card issuer for unshipped merchandise and have the charge removed from their account. To protect themselves from these chargebacks, the credit card processors may reserve or withhold other funds due to the retailer. That way, you get your money back from the credit card company rather than the debtor.
Difficulties of Fulfilling Customer Merchandise Orders
At the time of the bankruptcy filing, the retailer most likely has not yet received a large number of orders that are subject to Customer Deposits. In addition, many of the retailer’s vendors likely still possess merchandise that was special-ordered for the retailer’s customers, but the goods were not yet shipped to the retailer. Due to the financial constraints imposed by its lenders, particularly if the retailer is liquidating, it may not have the funding available to finance the purchase or delivery of this inventory. A thought here, you might have a lien on (or even own) the item you bought from the people the debtor purchased it from for you.
As always, a good bankruptcy attorney can guide you through these issues.