The order in which claimants are paid in a bankruptcy liquidation: senior secured creditors first, then junior secured creditors, unsecured creditors, mezzanine or convertible debt holders, preferred stockholders, and finally common stockholders, who receive whatever (if anything) remains. Each class must generally be paid in full before a junior class receives any recovery.
Practice questions using Priority Waterfall
Original questions written against the published FINRA and NASAA exam content outlines — not actual exam questions. Every choice is explained.
In a bankruptcy liquidation, which of the following claimants is generally paid FIRST, ahead of the others listed?
A.Common stockholdersWrong. Common stockholders are generally paid last, only after all creditor and preferred claims are satisfied.
B.Senior secured creditorsCorrect. Senior secured creditors rank at the top of the priority waterfall.
C.Preferred stockholdersWrong. Preferred stockholders rank above common stock but below all classes of creditors, including senior secured creditors.
D.Unsecured trade creditorsWrong. Unsecured creditors rank below both senior and junior secured creditors.
Why: Senior secured creditors (senior debt lenders) sit at the top of the priority waterfall, ahead of junior secured creditors, unsecured creditors, mezzanine/convertible debt holders, preferred stockholders and common stockholders, who are generally paid last, if anything remains.
A liquidating company has $70 million available to distribute. Claims rank, in order of priority: senior secured creditors owed $40 million, then unsecured creditors owed $50 million, then common stockholders. How much does each class receive?
A.Senior secured: $40M; unsecured: $30M; common: $0Correct. Senior secured is paid in full, unsecured recovers the $30M remainder, and nothing is left for common stock.
B.Senior secured: $31.1M; unsecured: $38.9M; common: $0Wrong. This splits proceeds proportionally across the two creditor claims instead of applying strict priority.
C.Senior secured: $40M; unsecured: $0; common: $30MWrong. This skips the unsecured class entirely and pays common stockholders ahead of unsecured creditors, reversing the actual priority order.
D.Senior secured: $23.3M; unsecured: $23.3M; common: $23.3MWrong. This splits the $70M evenly across three classes, ignoring the priority order entirely.
Why: Senior secured creditors are paid first and in full: $40 million. That leaves $70M − $40M = $30 million for unsecured creditors, who are owed $50 million — so they recover $30 million (60 cents on the dollar) and remain unpaid on the rest. Nothing remains for common stockholders, who receive $0.
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