In the case of bankruptcy, what rights do debt holders have?

In the event of bankruptcy, debt holders possess priority claims on company assets. This privilege arises from the nature of their investment, which typically entails a contractual agreement that stipulates they are repaid before equity holders in the event of liquidation.

When a company enters bankruptcy, it goes through a process where its assets are assessed, and the proceeds from liquidating those assets are used to pay off creditors. Debt holders, including bondholders and other secured creditors, receive payment based on the seniority of their claims. Secured debt holders, for instance, have their claims backed by specific assets of the company, such as property or equipment, giving them a stronger position compared to unsecured creditors.

Equity holders, including shareholders, only receive compensation after all debts have been settled, making debt holders a priority in the hierarchy of claims during bankruptcy proceedings. This critical distinction is foundational in understanding the risk-return profile of investing in debt versus equity instruments.