Order of debt repayment in insolvency: who gets paid first

When a debtor enters insolvency proceedings, the only practical question for a creditor is not whether the debt is recognized, but in which rank it sits. Two proofs of debt of the same amount can end with one paid in full and the other receiving nothing, only because they belong to different ranks.

The Insolvency and Economic Rehabilitation Law, 5778-2018 regulates this in one short, precise section, followed by a series of sections that give each rank its content.

The seven ranks

Insolvency and Economic Rehabilitation Law, section 231 (unofficial translation)

The debts of the debtor and the expenses of the insolvency proceedings shall be repaid from the assets of the insolvency estate in this order of priority: (1) secured debts; (2) expenses of the insolvency proceedings; (3) preferential debts; (4) debts for securing the repayment of which an asset was charged by a floating charge; (5) general debts; (6) additional interest; (7) deferred debts.

Two things deserve attention right away. First: a floating charge does not sit with the other securities in the first rank but in the fourth rank, after the preferential debts. This is the central difference between a fixed charge and a floating charge, and it shows up exactly at the moment when it matters. Second: interest added after the order is not part of the general debt but a separate, lower rank.

Equality within the rank

Section 232 sets one clear rule: the debts in each rank in the order of repayment are repaid to all the creditors in that rank at an equal rate according to their amounts, without any preference. There is no seniority, no order of filing, and no side agreements that prevail. Within the rank: proportional repayment, and nothing more.

Rank 2: the expenses of the insolvency proceedings

Section 233(a) defines four components: all the expenses arising from acts carried out by the trustee or someone on the trustee’s behalf as part of the proceedings, including fees and the trustee’s remuneration; the expenses of convening and running the creditors’ committee; for an individual who has died, reasonable funeral expenses and the expenses of the estate and its administration; and any other expense that a law provides is to be treated as an expense of the proceedings.

Section 233(c) adds a rule that a creditor holding a floating charge must know: if the assets of the insolvency estate that are not charged are not enough to repay the expenses of the proceedings, these expenses are repaid from the assets subject to a floating charge. In other words, the expenses of the proceedings eat into the floating charge before its turn comes.

Rank 3: preferential debts

Section 234(a) lists five types of debt, and they are repaid in the internal order in which they are listed:

• Wages and severance pay. A debt for wages within the meaning of the Wage Protection Law, 5718-1958, owed to an employee for the period before the application for an order to open proceedings was filed, and for severance pay under the Severance Pay Law, 5723-1963. The benefit paid under Chapter H of the National Insurance Law [Consolidated Version], 5755-1995 is deducted, and there is a cap: in the consolidated version, for 2026, NIS 33,250 for wages, or NIS 51,820 for severance pay together with wages (notice in Yalkut HaPirsumim 14278, 19 February 2026, p. 4144, in force from 1 January 2026). Section 234(a)(1)(b) provides that the amounts are updated on 1 January each year by the rate of change in the average wage, rounded to the nearest ten shekels, and the Minister publishes a notice of the update in Reshumot (the official gazette). So check the amount in force on the date of the order.
• Deductions that were not passed on. An amount the debtor withheld at source under sections 164 or 170 of the Income Tax Ordinance [New Version] (פקודת מס הכנסה [נוסח חדש]) and has not yet passed on to the Israel Tax Authority, and an amount withheld under section 342(c) of the National Insurance Law and not yet passed on to the National Insurance Institute (Bituach Leumi).
• Maintenance under a judgment that fell due before the order to open proceedings was given.
• The principal of a VAT debt to the Tax Authority that arose in the 12 months before the order was given. Note the two limits: principal only, and 12 months only.
• A compulsory payment under an installment arrangement signed before the order was given. The priority applies to the principal of the debt only, and is limited to charges that arose in a period of at most three years out of the arrangement. If the arrangement covers a longer period, the creditor chooses which three years, not necessarily consecutive.

The cap on wages and severance pay is the point where employees get an unpleasant surprise. Above the cap, the rest of the debt does not disappear: it drops to the rank of general debts, together with the suppliers. Just like section 233(c), section 234(b) also provides that if the uncharged assets are not enough, preferential debts are repaid from the assets subject to a floating charge. The rest of the wage and severance debt above the cap is claimed in the same proof of debt filed with the trustee, as a general debt (section 210(a)), and the benefit the employee received from the National Insurance Institute is deducted from the employee’s proof of debt (section 210(e)). The trustee’s decision can be appealed to the court (section 215). A separate legal proceeding against a corporation for which an order to open proceedings was given (including a claim that requires representation in the Labor Court) is possible only with the approval of the court that gave the order (section 29(5)).

Rank 5: general debts

Section 235(a) defines them by what they are not: debts that are not secured, not preferential and not deferred. This is where most suppliers, service providers and judgment holders are found.

Section 235(b) sets out what they include: linkage differentials added by law or agreement up to the date of actual repayment, and basic interest added by law or agreement up to the date the order was given. If no linkage differentials or basic interest were set by law or agreement, linkage differentials and linked interest are added under the Adjudication of Interest and Linkage Law, 5721-1961 (חוק פסיקת ריבית והצמדה, התשכ״א-1961). Section 235(c) expressly excludes an arrears surcharge.

The distinction between the dates is the heart of the matter: linkage is counted up to actual repayment, interest is counted only up to the order. Any interest added after the order drops to rank 6.

Ranks 6 and 7: additional interest and deferred debts

Section 236(a) defines “additional interest” as two components. The first: the interest and any other addition added to past debts (other than deferred debts) from the date the order was given until they are repaid, including interest added to secured debts that cannot be repaid from the charged assets. The second: an arrears surcharge added up to the date the order was given. Section 236(b) sets an internal order within this rank too.

Section 237 lists the deferred debts, in order: punitive payments imposed on the debtor; and for a debtor that is a corporation, debts to members of the corporation arising from their being members, and debts for which there is a ground to suspend repayment under section 6(c) of the Companies Law, 5759-1999 (חוק החברות, התשנ״ט-1999) or under any other law. A shareholder who lent money to their company will end up here only if there is a ground to suspend repayment of the debt. Under section 6(c) of the Companies Law, this is possible when the conditions in section 6(a) for attributing the company’s debt to the shareholder are met, or under another law. Otherwise, an unsecured loan is a general debt.

What happens if something is left over

Section 242 answers the question that almost never comes up, but matters when it does: if assets are left in the insolvency estate after all the debts to the creditors and the expenses of the proceedings have been paid in full, then in insolvency proceedings of an individual the balance goes to the individual, and in proceedings of a corporation to the members of the corporation.

The distribution itself is regulated in sections 238 to 241. It is made to creditors with a past debt whose proof of debt was approved and who are not secured creditors, and it is carried out in interim distributions and a final distribution.

What this means for a creditor in practice

• First set the rank, and only then the amount. A well-drafted proof of debt placed in the wrong rank is worth less than a simple claim in the right rank.
• Do you hold a floating charge? Assume that the expenses of the proceedings and the preferential debts will come before you. Sections 233(c) and 234(b) say so expressly.
• An employee whose debt is above the cap: in the proof of debt, set out the part within the cap, as a preferential debt, and the rest, as a general debt. Also check which up-to-date cap amount applies to the case: the amounts are updated on 1 January each year (section 234(a)(1)(b)).
• A VAT debt: check the dates. The priority applies to the principal of a debt that arose in the 12 months before the order, not to the interest and not to an older debt.
• An installment arrangement already exists? Under section 234(a)(5), the creditor chooses which three years enjoy priority. This choice is worth making by calculation, not by default.
• Interest that accrued after the order is not part of the general debt. Sections 235(b) and 236(a) separate the two, and this separation determines the size of the dividend.

Frequently asked questions

Which debts are preferential debts?

Section 234(a) lists five: wages and severance pay up to a cap; amounts the debtor withheld at source under the Income Tax Ordinance or the National Insurance Law and did not pass on; a maintenance debt under a judgment that fell due before the order; the principal of a VAT debt that arose in the 12 months before the order; and a compulsory payment under an installment arrangement signed before the order, principal only and for three years at most.

Do all creditors of the same rank get the same?

Yes, in proportion to the size of the debt. Section 232 provides that the debts in each rank are repaid to all the creditors in that rank at an equal rate according to their amounts, without any preference.

Where does a floating charge rank in the order of repayment?

In the fourth rank, after the expenses of the proceedings and after the preferential debts. Moreover, sections 233(c) and 234(b) provide that if the uncharged assets are not enough, the expenses of the proceedings and the preferential debts are repaid from the assets subject to the floating charge.

What happens to interest that accrued after the order was given?

It is not part of the general debt. Section 235(b) includes in the general debts basic interest only up to the date the order was given, and section 236(a) defines the interest added from the date of the order until repayment as additional interest: the sixth rank, after the general debts.

By when do you file a proof of debt with the trustee?

A creditor with a past debt may file a proof of debt with the trustee within six months from the date the order to open proceedings was published (section 210(a)). A past debt that arose after the order was given is claimed within 45 days from the day it arose, or by the end of the six months, whichever is later (section 210(b)). The trustee may extend the period if the creditor could not file on time and it is just to do so, also taking into account the stage at which the request was filed (section 210(c)). The trustee’s decision on the proof of debt can be appealed to the court (section 215).