Preferred creditor

A preferred creditor has the right to obtain payment from a business ahead of other creditors. This status is of most importance when the borrower enters bankruptcy and there are not enough residual assets to pay all creditors. Preferred status is conferred when a creditor obtains a valid lien on the borrower's assets or a right to payment by some other means. Typically, a preferred creditor may be able to obtain the full amount owed by a borrower, while general (unsecured) creditors obtain reduced payments or no payments at all. For example, a bank issues a loan to a borrower in exchange for collateral; the collateral allows the bank to obtain full repayment if the borrower enters bankruptcy. Similarly, a government entity has a legal right to obtain unpaid taxes from a bankrupt business.