 Affirm with insufficient cash to make its contractual payments is said to be a financially distressed firm. There are a variety of distressed events under which a firm may fall financially like dividend reductions, plant closures, losses and layoffs, CEO resignations and falling in the company's stock prices or insufficient operating cash flows of the firm to cover its current obligations. Financial distress may lead a firm to default on its contractual obligations or contractual payments and this may further involve financial restructuring between the firm, its creditors and its equity investors or equity shareholders. A financially distressed firm is generally forced to take corrective actions. Financial distress can be linked with the insolvency whereas insolvency may lead to bankruptcy. Now in Blake's law dictionary insolvency is defined as inability to pay one's debt, lack of means of paying one's debt, such a condition of a woman's or a man's assets and liabilities that the former made immediately available would be insufficient to discharge the latter. Insolvency can be classified into two forms. The first is the stock-based infancy that refers to a situation where the total assets of a firm are far short of its total debt and this is a situation that yields negative equity for the firm. The second form of insolvency is the flow-based insolvency. In this form of insolvency, the operating cash flows of the firm are so much lesser that they cannot meet the contractual obligations of the firm. There are two ways in which the financial distress can be dealt. The first is the assets restructuring and the second way is the financial restructuring. In asset restructuring, the option is to dispose of the firm's assets or the merger of a firm with another firm or the reduced spending on the firm's capital expenditure investment and its R&D activities. In second way, to deal with financial distress is the financial restructuring that refers to the issuance of new securities, negotiating with banks and other creditors or exchange of debt with the equity instrument or filing for the bankruptcy. Now, financial distress works as an early warning system for the firm. Now, if the firm is leveraged and the firm is highly leveraged, then this high levered firm will be getting this financial disturbance earlier. So, the firm will have a good time for private workouts or formal reorganization and if the firm is of low leverage, then this low levered firm will get the trouble at later stages. And in this way, such type of low levered firm will be forced to go for a liquidation. Now, there are two options available with the firm that is unable to choose to make contractual payments. These options include termination of a firm as a going concern and reorganization of a firm as a going concern. In first case, whereas we have termination of a firm as a going concern, the firm is ready now for a selling of its assets for a solvage value and the net proceeds from this solvage value is distributed among the creditors of the firm in a preset order. In second option of reorganization of the firm as a going concern, the firm issues new securities to replace its existing or old securities. Now, the liquidation and formal reorganization can be done in the wake of bankruptcy. The bankruptcy is a situation that refers to a legal proceeding undertaken through the filing of the petition and that is done voluntarily by the corporation's owners or shareholders or it is done involuntarily by the creditors. Now, what is the order in which the creditors are paid by the firm at the time of its liquidation? That is called as priority of claims. This priority of claim is termed as absolute priority rule and it works in a particular order like admin expenses related to liquidation of the bankrupt company's assets, unsecured claims arising after the filing of an involuntarily bankrupt petition, then wages, salaries and commissions is paid, then contribution to employees' benefit plans arising within 180 days before filing date, this amount is paid and then if the amount is still in remaining, it will be paid for the consumer's claim, then tax claims are paid and then secured and unscured creditors' claims are paid and if still there is some residual amount, then the preferred stockholders' claims will be paid, including their unpaid dividends and if still there is some remaining amount, this remaining amount in wholly solely, it will be paid to the common stockholders' claim.