What are secured creditors and why do they have higher priority than employee wages in a bankruptcy?

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What are secured creditors and why do they have higher priority than employee wages in a bankruptcy?

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Anonymous 0 Comments

Secured creditors are lenders that the borrower has pledged some form of collateral. Their loans are therefore “secured” by some asset. In general, the receivers appointed by the courts will honor these pledges. Hence secured creditors are typically given a high seniority (the proper term for loan repayment priority).

The main reason why secured loans can be offered at lower interest rates is this high seniority and the protection offered by being secured. Without this, firms will find it more expensive or even impossible to obtain loans.

Anonymous 0 Comments

A secured creditor is one where the credit was given with the property bought securing the loan. The most well known version of these are mortgages and car loans. Generally, they are top priority, but only up to the securing property. Basically, if the company took out a loan to buy some equipment, in a bankruptcy, they have to give the equipment to the bank that gave them the loan, though they should get back any amount beyond the amount of the loan.

If the loan exceeds the value of the property (aka, is underwater), the exact rules vary by jurisdiction. In many, they end up equal to other creditors, while in others they may be below. In some, they have no claim to any amount beyond the property and direct damages.