5. The wages due workmen, clerks, servants, etc., earned within three months prior to the date of commencement of proceedings—not exceeding $300 to each claimant.
6. Debts owing to any person who, by federal or state law, is entitled to priority. In the State of Pennsylvania claims on account of rent are frequently entitled to this kind of priority.
Creditors who are fully secured rest their claims against the security held by them and not against the trustee. Any surplus realized on the property held must be turned over to the trustee for the benefit of unsecured creditors. The general rule in the case of a lien is that the remedy against the property must be exhausted first before any creditor may share with the unsecured creditors. When all the property has been realized upon and all the cash which has come into the hands of the trustee has been disbursed in satisfaction of the claims of the various creditors, the trustee’s duties are at an end and his records may be closed up.
Statement of Affairs
While having no legal status in this country, the statement of affairs, as it is called, is used to serve certain purposes in connection with matters in insolvency proceedings. Under the English bankruptcy laws such a statement is required of every insolvent debtor. Its complementary schedule, known as the deficiency account, is also required. In this country the chief significance of these two forms of statement is found in the examinations set by the various state boards of certified public accountants. They may, however, serve some additional purposes, chief of which are the following:
1. To show whether a receiver in equity should be appointed to manage the affairs of the business.
2. To show whether the creditors should advance funds in order to allow the business to continue, and perhaps in this way be able to meet its debts in full.
3. To show whether bankruptcy should be forced.
4. It may prove a valuable method of showing the exact condition of affairs to an incoming partner or investor.
The statement of affairs presents lists of all assets at their book values and also at the values which they might fairly be expected to realize upon a forced sale. Against this showing of the assets, an analysis is set up of all the claims against the business by its outside creditors on the basis of the various classes of creditors referred to above, namely, preference creditors, fully secured creditors, partially secured creditors, and unsecured creditors. Such a statement gives information in such form that it can be used for the purposes enumerated above. There are two forms of presenting this information. In the one the liabilities are shown on the left-hand side and the assets on the right-hand side, as is the case with the English form of balance sheet. The reason sometimes given for this is either that it is analogous to the English form of balance sheet or that in such a case the liabilities may be expected to exceed the assets and are therefore of prime importance. In the other form the assets are shown on the left and the liabilities on the right, as in the usual form of balance sheet. This latter form is the one shown here. The statement of affairs thus ties together the values shown on the balance sheet as taken from the books, with a fair estimate of the values which may be realized, and so indicates the shrinkage in value expected by forced realization of the assets.