In liquidation priority, which class is paid first?

• A. Secured creditors
• B. Unsecured creditors
• C. Subordinated debt holders
• D. Preferred stockholders

Answer: (A)

In liquidation, payments follow the priority of claims, with secured creditors at the top. Their debt is backed by specific collateral, giving them a lien on those assets. If the debtor's assets are sold, the secured creditors are entitled to be paid first from the proceeds of that collateral. This means they can recover up to the value of the collateral that secures their loan before any other creditors receive payment. If the collateral fully covers the debt, they’re paid in full; if not, the shortfall reduces the funds available for everyone else. After secured creditors are satisfied, the remaining assets (if any) go to unsecured creditors, then subordinated debt holders, then preferred stockholders, and finally common stockholders. The crucial point is that collateral-backed claims take priority in liquidation, which is why secured creditors are paid first.