What is the order of creditor preference during a company bankruptcy?

The correct order of creditor preference during a company bankruptcy aligns with the legal hierarchy of claims that are settled when a company is liquidating its assets.

During bankruptcy, secured creditors (those holding senior debt) are paid first because they have collateral backing their loans. After the senior debt is settled, subordinated debt holders come next. These creditors are subordinate to the senior debt but are prioritized over equity holders. Following that, preferred stockholders are next in line; they typically receive their payments before common stockholders but are below all forms of debt in the hierarchy. Finally, common stockholders are at the bottom of the bankruptcy distribution hierarchy, receiving payments only after all debts and preferred equity have been cleared.

Understanding this order is crucial, as it reflects the risk associated with different investment types. Senior debt is less risky and hence has priority in getting repaid compared to subordinated debt and equity. This structure helps potential investors gauge the risk and return profile of various financial instruments before investing.