Legal Definitions - administrative expenses

In the context of bankruptcy, administrative expenses are the costs and fees incurred after a bankruptcy case has officially begun. These expenses are considered essential for managing the bankruptcy process, preserving the debtor's assets (often referred to as the "bankruptcy estate"), or allowing the business to continue operating during a reorganization period.

Because these expenses are crucial for the successful administration of the bankruptcy case, they are given the highest priority for payment among all creditor claims. This means they must be paid in full before most other debts that existed prior to the bankruptcy filing.

To qualify as an administrative expense, a cost generally must meet two main conditions:

• It must have arisen from a transaction or activity that occurred after the bankruptcy petition was filed.
• It must have been "actual and necessary" for the preservation of the bankruptcy estate or for the administration of the bankruptcy case itself.

Here are some examples to illustrate how administrative expenses work:

• Example 1: Utility Bills for a Bankrupt Business

  Imagine a restaurant chain, "Gourmet Bites Inc.," files for Chapter 11 bankruptcy to reorganize its debts. To prepare for an eventual sale of its remaining assets and to keep its main kitchen facility secure, the bankruptcy court allows the company to continue operating the facility for a few months. The electricity, water, and gas bills incurred for this kitchen *after* Gourmet Bites Inc. filed for bankruptcy would be considered administrative expenses.

  Explanation: These utility costs are "actual and necessary" to preserve the physical assets and maintain the facility's value, which ultimately benefits all creditors by facilitating an orderly sale. They arose post-petition and are crucial for the estate's preservation.

• Example 2: Legal Fees for Bankruptcy Professionals

  When "Innovate Tech Solutions" files for Chapter 7 bankruptcy, a bankruptcy trustee is appointed by the court to oversee the liquidation of its assets. The trustee hires a specialized attorney to help navigate complex intellectual property issues related to Innovate Tech's patents, ensuring they are properly valued and sold to maximize returns for creditors.

  Explanation: The fees paid to the attorney hired by the trustee *after* the bankruptcy filing are administrative expenses. These legal services are "actual and necessary" for the proper administration of the bankruptcy case, specifically to identify, protect, and sell the estate's assets for the benefit of creditors. The trustee's own court-approved compensation would also fall into this category.

• Example 3: Post-Petition Insurance Premiums

  A commercial real estate company, "Prime Properties LLC," files for Chapter 11 bankruptcy. To protect its valuable portfolio of office buildings from fire, theft, or other damage while the bankruptcy case proceeds, the company (as the debtor-in-possession) continues to pay property insurance premiums on these buildings.

  Explanation: The insurance premiums paid *after* Prime Properties LLC filed for bankruptcy are administrative expenses. These payments are "actual and necessary" to preserve the value of the primary assets of the bankruptcy estate. Without insurance, a catastrophic event could significantly diminish the value of the estate, harming all creditors. The obligation for these payments arose post-petition to protect the estate.