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

Question

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

In: 2

Answer 1

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.