Bankruptcy - Who Gets Paid First?

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on December 14, 2022

Section 507 of the Bankruptcy Code outlines which order creditors are paid back in the event of a bankruptcy.

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.

FAQs

What does bankruptcy mean?

Bankruptcy is a legal proceeding in which a debtor declares their inability to pay back their creditors.

What are the different types 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.

What is Chapter 7 bankruptcy?

Chapter 7 is known as a liquidation bankruptcy. Most of your property will be sold to pay off your debts, then whatever debt in excess of the value of your liquidated property will be cleared.

What is Chapter 13 bankruptcy?

Chapter 13 bankruptcy is a reorganization bankruptcy. With Chapter 13, you are able to keep your personal property and reorganize your debts to a payment schedule that enables you to pay back your creditors over time (often 3 to 5 years).

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®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, 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.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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