I’m noticing some discrepancy between the hierarchy of payments in liquidation between achievable materials and the Kaplan QBank/what I can find online. In the latter resources, quiz questions are correctly answered using the hierarchy:
Secured creditors: Receive the full value of their collateral
Priority unsecured claims: Include tax claims, employee claims, and certain administrative fees
General unsecured creditors: Share any remaining value pro rata
Equity holders: Receive any remaining funds
In achievable, taxes and employee claims are always accepted as having priority over secured debt. Is this strictly referring to funds that are available after collateral-based payments are made to secured creditors? How will I know which hierarchy to use on the exam? Thanks.
Hi Christian, we cover this thoroughly in our chapter on Assets upon liquidation:
Please make sure to read the chapter carefully, particularly this section:
There can be some confusion from the order of unpaid wages & taxes vs. secured creditors, depending on the source of information. Secured creditors have first rights to the collateral backing the loan. The liquidation priority above applies if the collateral backing the loan is liquidated and does not cover the loan balance.
To demonstrate this, assume a secured creditor is owed $1,000, while $100 of wages and $100 of taxes are outstanding. If the collateral backing the secured loan is liquidated for a total of $600, it all goes to pay back the secured creditor, bringing their loan balance down to $400. Now, the rest of the company’s assets are liquidated for a total of $500. $100 goes to unpaid wages, $100 goes to unpaid taxes, and the remaining $300 goes to the secured creditor. This scenario leaves the secured creditor with $100 unpaid.
The order of unpaid wages & taxes vs. secured creditors is not a heavily tested concept. Questions on the priority of creditors (bondholders) vs. equity holders (stockholders) are much more common on the exam.
Thanks for the quick reply. I have read the chapter carefully and understand the explanation clearly. This is why I was surprised to get the question wrong in the Kaplan QBank. There was no mention of collateral being liquidated. It was just a broad question about the payment hierarchy. Are you able to say whether FINRA would include mention of collateral in a question on the exam, or could I face a question similar to the Kaplan QBank? Should the default be the order listed in Achievable materials, or what other sources seem to favor; Secured creditors before unpaid wages and taxes (unsecured creditors). Understand if you’re not in the position to give a definitive answer. Thanks.
We recommend you follow the liquidation priority we describe in our materials:
Unpaid wages
Unpaid taxes
Secured creditors
Unsecured creditors
Junior unsecured creditors
Preferred stockholders
Common stockholders
Actual FINRA questions shouldn’t have ambiguity on this specific topic in their wording. In the unlikely event you come across a question that you feel could be interpreted in multiple ways, it is possible to submit an appeal. Do your best to remember as much detail about the question as possible, and include this information in your communication with them.