What is the order of liquidation priority in bankruptcy?

In bankruptcy, claims are paid in this strict order: (1) Secured creditors — bondholders with collateral backing their loans, (2) Unsecured creditors — general bondholders and trade creditors with no collateral, (3) Preferred stockholders — receive a fixed claim before common stockholders, (4) Common stockholders — last in line and most likely to receive nothing. This order is sometimes called the 'absolute priority rule.'

Why do common stockholders have the highest risk in bankruptcy?

Common stockholders are the residual claimants — they only receive assets after all creditors and preferred stockholders have been paid in full. In most bankruptcies, liquidation proceeds are insufficient to reach common stockholders, making their investment worthless. This is why common stock has the highest risk but also the highest potential return in a healthy company.

What is the difference between secured and unsecured bondholders?

Secured bondholders have specific collateral pledged against their bonds — if the company defaults, they have a claim on specific assets like property or equipment. Unsecured bondholders (debenture holders) have no collateral; they are general creditors. In bankruptcy, secured bondholders are paid first from the collateral, and unsecured bondholders share in remaining assets. This is why secured bonds offer lower yields — they carry less risk.

Do preferred stockholders always get paid in bankruptcy?

Not necessarily. Preferred stockholders rank above common stockholders but below ALL creditors — both secured and unsecured. If the company's liquidation proceeds are exhausted paying creditors, preferred stockholders receive nothing. Preferred stock only provides priority over common stock, not over any form of debt.

What is the absolute priority rule?

The absolute priority rule is a bankruptcy principle that requires senior claimants to be paid in full before junior claimants receive anything. It enforces the strict hierarchy: secured creditors first, then unsecured creditors, then preferred stockholders, then common stockholders. No class can receive a recovery until every class above it has been made whole.

SIE & Series 7 Tool · Updated 2026

Capital Structure Visualizer

Name: Capital Structure & Liquidation Priority Visualizer
Author: 2DollarTests

Who gets paid first when a company goes bankrupt? Set the claims, drag the asset slider, and watch the waterfall fill — or run dry.

⚙️ Scenario Setup

Quick Scenarios

Liquidation Proceeds $600M

Drag to simulate how much cash the bankruptcy sale generates.

Claim Amounts

Secured Creditors

$ M

Unsecured Creditors

$ M

Preferred Stock

$ M

Common Stock

$ M

Total Claims $1,000M

Proceeds $600M

Shortfall $400M

Overall Recovery 60%

① FIRST Secured Creditors PAID IN FULL

$200M

100% of claim

Collateral-backed bonds, mortgages, equipment liens. Paid first from specific pledged assets.

remaining proceeds flow down ↓

② SECOND Unsecured Creditors PAID IN FULL

$300M

100% of claim

Debentures (unsecured bonds), trade creditors, general bondholders. No specific collateral.

remaining proceeds flow down ↓

③ THIRD Preferred Stockholders PAID IN FULL

$100M

100% of claim

Fixed-dividend shareholders. Rank above common stock but below ALL creditors.

remaining proceeds flow down ↓

④ LAST Common Stockholders PAID IN FULL

$100M

29% of claim

Residual claimants. Receive whatever is left — often nothing. Highest risk, highest potential reward.

✅ All Claimants Paid

Liquidation proceeds are sufficient to satisfy all claims. Common stockholders receive the residual. This is an unusual outcome — in most bankruptcies, equity holders receive nothing.

Secured Creditors — First Priority

Hold collateral-backed debt. If the company defaults, they have a legal claim on specific assets (real estate, equipment, receivables). Examples: mortgage bondholders, equipment trust certificates.

Why lowest yield? Lowest risk = lowest required return. Secured creditors sleep at night even in bankruptcy.

Unsecured Creditors — Second Priority

General creditors with no specific collateral. Includes debenture holders (unsecured bonds), trade payables, and notes payable. Paid from remaining assets after secured claims.

Higher yield than secured to compensate for the additional risk of being behind secured creditors.

Preferred Stockholders — Third Priority

Equity holders with a fixed dividend and priority over common stock — but below all creditors. Often misunderstood: "preferred" only means preferred over common stock, not over any debt.

Key exam trap: Preferred stockholders rank after ALL bondholders, not just common stockholders.

Common Stockholders — Last Priority

Residual claimants — receive whatever (if anything) is left after everyone else is paid. In most bankruptcies, common stockholders receive nothing.

Why accept this risk? In a healthy, growing company, common stockholders capture all the upside. The trade-off: highest risk, highest potential return.

💡 Exam mnemonic: "Secured, Unsecured, Preferred, Common" → SUPC → "Super Unfortunate Preferred Commoners." Senior to junior, creditors before equity — every time, no exceptions. If the SIE gives you a bankruptcy scenario, rank from top to bottom and work the math downward.

Know Who Gets Paid. Pass Your Exam.

The SIE tests liquidation priority in nearly every exam sitting. Don't just know the order — understand the logic behind it.

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About this tool: Interactive capital structure and liquidation priority visualizer for the FINRA SIE and Series 7 exams, updated for 2026. Set claim amounts for each tier of the capital structure, drag the liquidation proceeds slider, and watch the waterfall fill from secured creditors to common stockholders. Demonstrates the absolute priority rule. Published by 2DollarTests.

Know Who Gets Paid. Pass Your Exam.

Capital Structure Liquidation Priority Summary