Preferred debt is debt that must be repaid or liens that must be fulfilled before other debts. Such debt can be of varying levels of seniority, indicating at what point particular debts will be paid off. A first mortgage, for instance, takes seniority over other mortgages, and so it is a form of preferred debt. Different forms of debt, as well different specific debts, will take on different levels of seniority, representing how quickly the debts are fulfilled.
Debts can often build up on a company over time. Many debts are, such as loans, are collateralized on assets held by a company. These assets usually get pledged as a way for a company to increase its chances at obtaining funding, or to get a better interest, better terms, a better loan value, or all of the above. A company can then reinvest with the capital it has obtained, using it for operating expenses, purchases, training and hiring employees, renting or leasing facilities or equipment, and any number of other purposes. It is then expected that through these subsequent investments, made possible by taking on debts, a business should be able to become more profitable.
However, these kinds of situations problems can arise. Unexpected losses, emergencies, and other misfortunes can change a company’s plans and eventually result in it becoming incapable of making payment on its debts. Prior to this happening, a company should of course do its best to streamline, reduce expenses, increase efficiency and profitability, and using the most valuable technology and methodology available for its line of work (note that valuable includes quality—cheapest isn’t always best). Defaulting on debts can often be avoided with good management techniques and coordinating ones’ efforts for the greatest profit. Also, loans can sometimes be refinanced to make them easier to pay.
If debts are defaulted on, however, it then becomes an issue of seniority to determine which debts are paid off before the others, and that falls to preferred debt.
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