When a Company Goes Bankrupt, Who Gets Paid First?
1. When a company goes bankrupt, secured creditors get paid first. This includes secured bondholders.
These are creditors who offered loans secured by physical assets.
Usually they get paid by reclaiming their property.
2. Next in line are the unsecured creditors, who gave loans that were not secured by property.
3. Last in line are the company shareholders.
Each tier outlined in Section 507 of the Bankruptcy Code must be paid in full prior to the next tier is paid.
While stocks have historically compensated investors higher than other asset classes, it’s worth noting that stockholders are last in line to get paid back in the event of a bankruptcy.
When a Company Goes Bankrupt, Who Gets Paid First FAQs
What Is Bankruptcy?
What Is Bankruptcy? The Three Chapters of Bankruptcy
There are three common types of bankruptcy known as “chapters”in the U.S. bankruptcy code, Ch. 7, Ch. 11, and Ch. 13, each with varying criteria and consequences.
Ch. 7 Bankruptcy
The most common type of bankruptcy is Chapter 7.
Chapter 7 bankruptcy is known as “straight”or “liquidation”bankruptcy.
It is designed to give a “fresh start”by discharging debts that cannot be repaid through the liquidation of the debtor’s assets.
Upon filing Chapter 7, a trustee is appointed to sell the debtor’s non-exempt assets and distribute the proceeds to creditors.
For individuals, the law exempts certain assets such as retirement funds, primary residence, tools for their trade, and personal vehicles from being liquidated to pay back creditors.
This pays back creditors some of what they are owed and protects individuals from having all of their livelihood taken from them.
Ch. 11 Bankruptcy
Chapter 11 bankruptcy is primarily for companies, allowing them a break on paying their debts in order to restructure, come up with new terms for paying their creditors, and become profitable again.
This allows companies to stay afloat while coming up with a new way to pay back creditors.
Chapter 11 is the most complex and expensive form of a bankruptcy proceeding and should therefore be considered after other options have been explored.
Ch. 13 Bankruptcy
Chapter 13 bankruptcy, known as a “Debtor in Possession” Bankruptcy, stands in contrast with Chapter 7 because it allows the individuals to keep from liquidating their property.
Chapter 13 creates a new, more affordable payment plan for the debtor to repay creditors, usually lasting 3 to 5 years.
Once the payment plan is finished, the remaining unsecured debts are discharged.
You Can Avoid It
Bankruptcy is the least thing any business would want to experience. But sometimes because of reluctance, many business owners limit themselves from exploring the many benefits of getting help from financial advisors. Financial advisors can be a great help in steering a business to the path of profitability. Connect with a financial advisor in Beachwood, OH or check out our financial advisor page to see one closest to your area.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.