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. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  2. Do working capital funds expire?

    While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
  3. How much working capital does a small business need?

    The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
  4. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>
  5. How can working capital affect a company's finances?

    Working capital, or total current assets minus total current liabilities, can affect a company's longer-term investment effectiveness ... Read Full Answer >>
  6. What can working capital be used for?

    Working capital is used to cover all of a company's short-term expenses, including inventory, payments on short-term debt ... Read Full Answer >>
Related Articles
  1. Professionals

    4 Must Watch Films and Documentaries for Accountants

    Learn how these must-watch movies for accountants teach about the importance of ethics in a world driven by greed and financial power.
  2. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  3. Entrepreneurship

    10 Ways to Be a Successful Entrepreneur

    Are you hoping to launch your own business and work for yourself? If so, here are the top 10 tips for entrepreneurs.
  4. Markets

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  5. Investing Basics

    How To Efficiently Read An Annual Report

    Annual reports are clearly prepared without any intent to deceive or mislead investors. Still, investors should read them with a dose of skepticism.
  6. Investing Basics

    Explaining Financial Statement Analysis

    Financial statement analysis is the process of reviewing a company’s statements to gain an understanding of its financial health.
  7. Investing Basics

    How Financial Statements Are Manipulated

    Financial statement manipulation is an ongoing problem, and investors who buy stocks or bonds should be aware of its signs and implications.
  8. Investing News

    Defensive Investing: Learn from a Hedge Fund Pro

    Looking for ideas on companies, sectors or investments to short? Consider the opinion of this hedge fund luminary.
  9. Bonds & Fixed Income

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  10. Professionals

    5 Financial Careers You Didn’t Know Existed

    Discover some often overlooked financial career opportunities, and learn how accountants can catch the bad guy or rub elbows with Hollywood's elite.
  1. Accountant

    A professional who performs accounting functions such as audits ...
  2. Personal Finance

    All financial decisions and activities of an individual or household, ...
  3. Audit

    An unbiased examination and evaluation of the financial statements ...
  4. Encumbrance

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

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

    Expenses associated with the maintenance and administration of ...

You May Also Like