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. Do creditors have the same rights in all 50 US states?

    Learn more about the rights of creditors to pursue their debts; how they may vary from state to state and how they are regulated ... 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. Investing

    Fighting Back Against Collection Lawsuits

    There are still options available to those being pursued by a creditor.
  3. Personal Finance

    7 Tips For The Do-It-Yourself Debt Manager

    Hired gun not in your budget? Learn to be your own credit counselor.
  4. Small Business

    Taking Advantage Of Corporate Decline

    A bankrupt company can provide great opportunities for savvy investors.
  5. 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.
  6. Personal Finance

    Unemployed? 5 Smart Ways to Get Control of Debt

    When you're unemployed and barely making ends meet, smart debt advice can help you stay on top of your payments and protect your credit rating.
  7. Investing

    How Corporate Events Affect Stock- And Bondholders

    Investors tend to buy either stocks or bonds, but rarely choose between the two. Find out when you'll benefit from one over the other.
  8. Managing Wealth

    Knowing Your Rights As A Shareholder

    Common shareholders typically enjoy six main rights.
  9. Personal Finance

    Refinance Vs. Debt Restructuring: What's Best For Your Credit Score?

    Discover key differences between refinancing and restructuring debt in regard to terms, the negotiation process and effect on credit scores.
  10. Investing

    Not All Debt Holders Are Equal

    Senior debt is borrowed money a company repays first if the company goes out of business.
RELATED TERMS
  1. Creditors' Committee

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

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

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

    A public notice to the creditors and debtors of an estate. The ...
  5. Preferred Creditor

    An individual or organization that has priority in being paid ...
  6. Absolute Priority

    A rule that stipulates the order of payment - creditors before ...
Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  3. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center