Legal Definitions - prior creditor

A prior creditor is an individual or entity whose legal claim to be repaid a debt takes precedence over the claims of other creditors. This priority is often determined by law, the nature of the debt, or the chronological order in which the debt was incurred or secured. In situations where there isn't enough money to pay everyone, such as bankruptcy or the sale of assets, a prior creditor must be paid before other creditors receive any funds.

Here are some examples illustrating the concept of a prior creditor:

• Example 1: Real Estate Mortgages

  Imagine a homeowner who takes out a mortgage from "Bank A" to buy their house. Years later, they decide to take out a second loan, using their home as collateral again, this time from "Bank B." If the homeowner defaults on both loans and the house is sold, "Bank A" would be a prior creditor. Their mortgage was recorded first, giving them a superior claim to the proceeds from the sale of the house compared to "Bank B."

• Example 2: Business Bankruptcy

  Consider a small business that borrows a significant sum from "Lender X," securing the loan with all of its equipment and inventory. The business also owes money to various suppliers for goods purchased on credit (unsecured debt) and to its employees for unpaid wages. If the business declares bankruptcy, "Lender X" would typically be a prior creditor because its loan is secured by specific assets. In many jurisdictions, employees' claims for unpaid wages also receive a certain level of priority over general unsecured creditors, making them prior creditors for those specific amounts.

• Example 3: Government Tax Liens

  Suppose an individual owes a substantial amount in overdue income taxes to the government, which has placed a lien on their property. This individual also has outstanding credit card debt and an unsecured personal loan from a friend. If the individual's assets are liquidated to pay off debts, the government, with its tax lien, would often be a prior creditor. Many laws grant government tax claims a very high priority, meaning they must be satisfied before most other types of creditors can collect their debts.