| Administrative expense claims in bankruptcy cases are entitled to first priority ahead of all other general unsecured claims and, therefore, they are paid in full before all other unsecured claims to the extent there are available unencumbered funds in the debtor's bankruptcy estate. Administrative expense claims are given first priority status in bankruptcy to induce parties to do business with the debtor's bankruptcy estate.
An administrative claim is considered a first priority claim if it arises during the pendency of the debtor's bankruptcy case and is for "actual, necessary costs and expenses of preserving the estate." Administrative expenses cover expenses such as rent, wages, insurance, utilities, taxes and trade credit. However, the fact that an expense is deemed a first priority administrative expense claim does not mean that there will be sufficient unencumbered funds in the debtor's bankruptcy estate to pay it in full.
A debtor's estate is deemed to be administratively insolvent if there are insufficient unencumbered funds to pay administrative claims. Under these circumstances, creditors who provided goods or services to the debtor's estate post-petition and who remain unpaid may seek to surcharge a secured creditor's collateral on the ground that the secured creditor benefited from the post-petition goods or services that were provided. Generally, administrative expenses cannot be charged against a secured creditor's collateral, but are chargeable only against the estate's unsecured assets. The Executive Office of United States Trustees must issue schedules of reasonable and necessary chapter 13 administrative expenses for each judicial district for use in application of the means test.
A post-petition liability incurred by an individual debtor in a Chapter 7 or 11 case cannot be claimed in the bankruptcy case. This is because the individual debtor is a separate taxable entity from the estate in a Chapter 7 or 11 case. Taxes on the individual debtor's post-petition wages are incurred by the individual debtor, while taxes on income arising from assets which are property of the estate are incurred by the estate.
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