Legal Definitions - administrative expense

An administrative expense, particularly in the context of bankruptcy, refers to a cost that a business or individual incurs after they have filed for bankruptcy. These expenses are considered essential for the debtor (the person or entity filing for bankruptcy) to continue operating their business, manage their assets, or navigate the bankruptcy process itself. Because these costs are crucial for the ongoing viability or orderly winding down of the debtor's affairs, they are typically given a higher priority for payment from the available assets compared to debts incurred before the bankruptcy filing.

Here are some examples illustrating administrative expenses:

• Example 1: Essential Utilities for Continued Operation

  A small manufacturing company, "Precision Parts Co.," files for Chapter 11 bankruptcy to reorganize its debts. To keep its machinery running and continue producing goods to fulfill existing orders during the reorganization period, Precision Parts Co. must pay its monthly electricity bill and the lease for its factory space.

  Explanation: These utility and rent payments are administrative expenses because they are incurred after the bankruptcy filing and are absolutely necessary for Precision Parts Co. to continue its business operations, generate revenue, and work towards a successful reorganization. Without power and a place to operate, the business would cease to function, making reorganization impossible.

• Example 2: Professional Fees for Bankruptcy Administration

  A regional grocery store chain, "Fresh Foods Market," files for Chapter 11 bankruptcy. To comply with legal requirements, prepare detailed financial reports for the bankruptcy court, and negotiate with its creditors, Fresh Foods Market hires a bankruptcy attorney and a forensic accountant.

  Explanation: The fees paid to the attorney and accountant are administrative expenses. These costs are incurred after the bankruptcy petition and are essential for Fresh Foods Market to navigate the complex legal process, fulfill its obligations to the court, and manage its assets effectively during bankruptcy. These professional services are necessary for the orderly administration of the bankruptcy estate.

• Example 3: Purchasing New Inventory to Maintain Sales

  An online electronics retailer, "Tech Trends," files for Chapter 11 bankruptcy. To maintain sales, generate income, and preserve its customer base during the reorganization period, Tech Trends needs to purchase new, popular electronic gadgets to replace sold items and keep its virtual shelves stocked.

  Explanation: The cost of purchasing new, essential inventory *after* the bankruptcy filing is an administrative expense. This expenditure is necessary for Tech Trends to continue its core business operations, generate revenue, and maintain its value as a going concern, which is crucial for a successful reorganization and eventual repayment of creditors.