And the short-sellers get everything.
Not true. They don’t get the assets, for instance.
Creditors in order of priority from highest to lowest. I’m going on memory here, so I might be off here and there:
secured creditors
general creditors divided in priority by filing date (includes bonds and pensions)
rent, bills and other debt not paid post-filing (bonds usually at the top here)
rent, bills and other debt not paid pre-filing
preferred stockholders
common stockholders
That is the usual order.
Note how bonds are included in the general creditor category, not secured debt. Secured debt is just what it says: debt secured by an asset. Like mortgages. But bonds are not secured debt; they’re just promises to pay. This is why when a payment on a bond is not made, the usual move for the bondholders is to declare default and force the company into bankruptcy as quickly as possible so that the debt they’re owed moves up the priority list over other debt.
Note that short sellers have no participation in this process. But since the shares they sold no longer exist, they generally get to keep the proceeds. That said, shorting a stock is one of the most volatile trades possible and one has to have a very strong thesis
and a very strong stomach to do it. In theory, a short seller can lose big if the stock goes up a lot and he did it on margin, he can go broke easily. This is commonly known as the “short squeeze”. For a classic huge short squeeze, see the recent action on TSLA.
Some may recall GM’s bankruptcy in 2009 and how the process was taken over by the Obama Administration. Obama upset centuries of business bankruptcy precedents to get his buddies in the UAW placed ahead of the bondholders, but by doing that, he unknowingly screwed four other union pension plans that were major GM bondholders. Of course they made noise. Hence, it’s no coincidence we never saw him or anyone else pull that stunt again.
