Creditor Priority in Bankruptcy

Lesson Exercise Solution

When firms go bankrupt, many different parties will have claims to its assets.

Some claims are stronger than others, however.

Here's the order of priority from high to low:

Secured creditors - Creditors whose debts are backed by specific collateral
Priority unsecured claims - Unsecured debts that receive special legal priority over general unsecured claims (like wages, unpaid taxes, and bankruptcy administrative expenses)
General unsecured creditors - Creditors with no collateral backing and no statutory priority (like trade suppliers, customers with deposits, and holders of unsecured bonds)
Subordinated claim creditors - Creditors with debt obligations that are contractually agreed to rank below other senior debts for repayment
Preferred shares stockholders
Common shares stockholders

You're an accountant trying to understand how the assets in a bankruptcy case will be distributed.

Here's what you know:

Which of these two groups has priority in receiving assets in bankruptcy?

Secured creditors - Creditors whose debts are backed by specific collateral
Priority unsecured claims - Unsecured debts that receive special legal priority over general unsecured claims (like wages, unpaid taxes, and bankruptcy administrative expenses)
General unsecured creditors - Creditors with no collateral backing and no statutory priority (like trade suppliers, customers with deposits, and holders of unsecured bonds)
Subordinated claim creditors - Creditors with debt obligations that are contractually agreed to rank below other senior debts for repayment
Preferred shares stockholders
Common shares stockholders