What is the first step in the distribution of a debtor's estate?

The correct answer identifies the first step in the distribution of a debtor's estate as addressing security claimants. In bankruptcy proceedings, the distribution of assets must follow a specific hierarchy established by law, which determines how creditors are paid.

Security claimants, who hold secured claims against the debtor's assets, are prioritized in the distribution process because they have rights to specific collateral backing their claims. When certain assets are earmarked as collateral, these claimants are entitled to be paid before others in order to satisfy their secured interests. This priority is essential to ensure that those who have taken on risk by lending against collateral can secure the repayment from the proceeds of those assets in the event of liquidation.

In contrast, other groups, such as general creditors, priority claimants, and those owed administrative expenses, follow later in the payment hierarchy. General creditors are typically unsecured and do not have a claim to specific collateral, while priority claimants—such as certain tax claims—are also paid only after secured claims have been satisfied. Administrative expenses, representing costs incurred during the bankruptcy process, also rank below secured claims.

Understanding this hierarchy is crucial for grasping the structural framework of debt resolution in insolvency cases, particularly for those preparing for the CPA examination.