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Preferred Creditors: Definition, Priority, and Practical Examples

Last updated 03/23/2024 by

Alessandra Nicole

Edited by

Fact checked by

Preferred creditors, also known as “preferential creditors,” hold priority in receiving payment if a debtor declares bankruptcy. This comprehensive guide explores the concept of preferred creditors, types, their rights, and how they differ from unsecured creditors, providing essential insights for professionals in the finance industry.

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Understanding preferred creditors

What are preferred creditors?

Preferred creditors are individuals or entities entitled to priority payment if a debtor declares bankruptcy. They typically have the first claim to any available funds from the debtor.

Types of preferred creditors

Preferred creditors encompass various classes, including employees owed wages, tax authorities, environmental remediation entities, and tort victims. Each class may have different rights depending on jurisdiction.

Examples of preferred creditors

  • Employees: Workers owed wages by a bankrupt company.
  • Tax and revenue authorities: Government entities owed taxes.
  • Environmental remediation: Entities responsible for cleaning up environmental damage caused by bankrupt companies.
  • Tort victims: Individuals harmed by a “civil wrong.”

Preferred creditors vs. unsecured creditors

Differences between preferred and unsecured creditors

Preferred creditors have priority for payment during bankruptcy proceedings, while unsecured creditors are less likely to receive payment from the debtor’s assets.

Order of creditor ranking

In the U.S., the order of creditor ranking includes secured claims, administrative expenses, general unsecured claims, and equity interests. In the U.K., it involves fixed charge holders, liquidators‘ fees, preferred creditors, floating charge holders, unsecured creditors, and shareholders.

Special considerations

Precedence of preferred creditors

Preferred creditors generally take precedence over unsecured creditors. However, their priority may vary based on jurisdiction and the nature of the creditor’s claim.

Difference between fixed and floating charge holders

Fixed charge holders, such as banks holding title over business assets, have distinct rights compared to floating charge holders in bankruptcy proceedings.
Here is a list of the benefits and drawbacks to consider.
  • Priority in receiving payment during bankruptcy
  • Higher likelihood of recovering owed funds
  • Clear legal framework defining rights
  • Priority may vary based on jurisdiction
  • Not all creditors may receive full payment
  • Complexities in determining priority

Frequently asked questions

What is the difference between preferred and unsecured creditors?

Preferred creditors have priority for payment during bankruptcy, while unsecured creditors have lower priority and are less likely to receive payment.

Who are considered preferred creditors?

Preferred creditors include employees owed wages, tax authorities, entities responsible for environmental remediation, and tort victims.

Will I be paid if my employer goes bankrupt?

As an employee owed wages, you are considered a preferred creditor and have a higher likelihood of receiving payment compared to other creditors.

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