Which debt type typically has higher risk in liquidation, subordinated debt or senior debt?

• A. Subordinated debt
• B. Senior debt
• C. Both have equal risk
• D. Neither debt has risk

Answer: (A)

Debt recovery in liquidation follows a ranking of claims. Senior debt has priority over subordinated debt, so senior lenders are paid first from any available assets, and only after their claims are satisfied do subordinated creditors receive anything. Because there may not be enough assets to cover all debts, those lower in the hierarchy—subordinated debt—face a greater risk of partial repayment or nothing at all. In this context, subordinated debt typically has higher risk in liquidation, whereas senior debt carries less risk due to its higher priority. The idea that both have equal risk or that there is no risk doesn’t fit the payment order in bankruptcy.