A:

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

Stockholders

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.

RELATED FAQS
  1. What are the full rights of creditors in cases of bankruptcy?

    Learn more about corporate bankruptcy and the rights of creditors. Find out how creditors are repaid in the event of bankruptcy ... Read Answer >>
  2. Under what circumstances might a company decide to liquidate?

    Learn about the circumstances under which a company may decide to liquidate, and understand how assets are liquidated in ... Read Answer >>
  3. What happens when a corporation declares bankruptcy?

    Understand what options are available to corporations under bankruptcy protection, and learn what takes place after bankruptcy ... Read Answer >>
Related Articles
  1. Personal Finance

    What Does a Creditor Do?

    A creditor is a person or entity that loans money or provides goods or services to another entity with the expectation of being paid back in the future.
  2. Financial Advisor

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  3. Small Business

    Alternatives To Business Bankruptcy

    Bankruptcy isn't the only alternative for a struggling business. It can try negotiating with creditors or liquidating assets outside the U.S courts.
  4. Managing Wealth

    What Does Liquidation Mean?

    Creditors liquidate assets to try and get as much of the money owed to them as possible.
  5. Investing

    Fighting Back Against Collection Lawsuits

    There are still options available to those being pursued by a creditor.
  6. Small Business

    Taking Advantage Of Corporate Decline

    A bankrupt company can provide great opportunities for savvy investors.
  7. Personal Finance

    7 Tips For The Do-It-Yourself Debt Manager

    Hired gun not in your budget? Learn to be your own credit counselor.
  8. Investing

    What is an Unsecured Loan?

    An unsecured loan is based on the creditworthiness of the borrower, and has no collateral securing the loan.
  9. Small Business

    Chapter 11 Bankruptcy: Is It Better To Be a Stockholder or Bondholder? (BTU)

    Discover why energy companies are struggling to stay solvent, while examining the basics of Chapter 11 bankruptcy and its effect on stock and bond holders.
  10. Investing

    Equity Stripping Leaves Creditors Empty-Handed

    Add additional debt to your real estate assets to keep the creditors at bay.
RELATED TERMS
  1. Creditors' Committee

    A group of people who represent a company's creditors in a bankruptcy ...
  2. Creditor

    An entity (person or institution) that extends credit by giving ...
  3. Receiver

    A person appointed by a bankruptcy court or secured creditor ...
  4. Secured Creditor

    Any creditor or lender that takes collateral for the extension ...
  5. Unsecured Creditor

    An individual or institution that lends money without obtaining ...
  6. Notice To Creditors

    A public notice to the creditors and debtors of an estate. The ...
Hot Definitions
  1. Mobile Wallet

    Mobile wallet is a virtual wallet that stores payment card information on a mobile device.
  2. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  3. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  4. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  5. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  6. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
Trading Center