The Bankruptcy Code, section 507, states that when a corporation is liquidated, creditors are paid in a particular order:

Unsecured creditors - These are generally suppliers, employees, banks, and


Secured bondholders and other secured creditors are paid first because their money is usually guaranteed or "secured" by collateral or a contract. After secured creditors are paid, unsecured creditors are paid.

The first tier of unsecured creditors are those who are entitled to receive money from the company, but their claims are not secured or guaranteed. This group of creditors includes: bank lenders, employees, the government (taxes), suppliers and investors who have unsecured bonds.

The last group of creditors is the general creditors, which is largely made up of stockholders or shareholders. This set of creditors is paid if there is any money left over after all the other creditors have been paid. The general creditors are divided into creditors who have preferred stocks and those who have common stock. The preferred shareholders are paid before those who have common shares. If there is no money after the preferred shareholders are paid, then the common shareholders do not receive any money.

Essentially, unsecured creditors are paid after secured creditors and bondholders because the bondholders have a guarantee from the company. Unsecured creditors are paid before stockholders because stockholders are owners of the company and take greater risk.

To read more about corporate bankruptcy please refer to An Overview of Corporate Bankruptcy.

This question was answered by Chizoba Morah.

  1. What is a profit and loss (P&L) statement and why do companies publish them?

    A profit and loss (P&L) statement, or balance sheet, is essentially a snapshot of a company's financial activity for ... Read Full Answer >>
  2. How do dividends affect the balance sheet?

    Dividends paid in cash affect a company's balance sheet by decreasing the company's cash account on the asset side and decreasing ... Read Full Answer >>
  3. Are dividends considered an expense?

    Cash or stock dividends distributed to shareholders are not considered an expense on a company's income statement. Stock ... Read Full Answer >>
  4. Do dividends go on the balance sheet?

    The only account recorded on the balance sheet, when dividends are declared and before they are paid out to a company's shareholders, ... Read Full Answer >>
  5. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  6. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
Related Articles
  1. Economics

    Calculating Days Working Capital

    A company’s days working capital ratio shows how many days it takes to convert working capital into revenue.
  2. Professionals

    Career Advice: Accountant Vs. Controller

    Learn about the differences between controllers and accountants, how the two are related and which is the best career choice for aspiring bookkeepers.
  3. Professionals

    What is Cash Basis Accounting?

    Cash basis accounting recognizes revenues and expenses at the time cash is paid or received.
  4. Entrepreneurship

    What's a Good Profit Margin for a Mature Business?

    How to determine if the amount you clear dovetails with the competition.
  5. Economics

    Understanding Explicit Costs

    Common examples of explicit costs include wages, utilities, rent, raw materials, and other direct expenses companies pay to conduct business.
  6. Stock Analysis

    These S&P 500 Companies Hold the Most Cash

    Large cash positions allow for many different options and here's why they are beneficial to shareholders.
  7. Professionals

    Career Advice: Accounting Vs. Bookkeeping

    Learn the nuances that separate the similar careers of accounting and bookkeeping, and identify which is better for you based on your skills and career goals.
  8. Investing

    How Shackling Offshore Banks Will Impact You

    FATCA regulations have cast a wide net on offshore banking activities, and many innocent account holders might get caught in its tangle.
  9. Economics

    How to Tax The Cloud: An Economic and Legal Riddle

    Various states have been trying to figure out how to tax cloud-based services, but they just might be opening an economic and legal Pandora's box.
  10. Professionals

    Career Advice: Accounting Vs. Actuary

    Read about what life is like as an actuary or as an accountant, how the two careers are different and how to decide which is best for you.
  1. Encumbrance

    A claim against a property by a party that is not the owner. ...
  2. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and ...
  3. Operating Cost

    Expenses associated with the maintenance and administration of ...
  4. Trade Credit

    An agreement where a customer can purchase goods on account (without ...
  5. Normal Profit

    An economic condition occurring when the difference between a ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's ...

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!