Introductory Business Law CLEP Prep Practice Exam

In the United States, which of the following most accurately describes the priority of creditors when assets are liquidated of an insolvent debtor?

1. Secured creditors first, unsecured creditors second

2. Unsecured creditors first, secured creditors second

3. Volume of creditors first, individual creditors second

4. Unsecured creditors first, secured creditors third

The correct answer is: Secured creditors first, unsecured creditors second

Creditors are individuals or institutions who are owed money by a debtor. When a debtor is unable to pay off their debts and their assets must be sold off to pay back creditors, there is a specific priority that determines who gets paid first. In the United States, this priority is based on the type of creditor. A secured creditor is someone who has collateral or a legal claim on specific assets of the debtor, while an unsecured creditor does not have collateral or a legal claim. Therefore, it makes sense that secured creditors are paid first, followed by unsecured creditors. This is because secured creditors have a greater legal claim to the assets and are at less risk of losing out on their payment compared to unsecured creditors. None of the other options accurately describe the priority of creditors in the United States, as volume or type of creditor does not determine priority.