Financial Distress is when a company cannot meet its financial obligations. The risk of financial distress is increased with the increase of fixed financial obligations such as interest payments. This meaning that as a company increases its debt it also increases its likelihood of experiencing financial distress. (not taking the positive aspects of debt into consideration.)
If Bankruptcy results from this distress the shareholders are burdened with the cost and the Equity is shifted from the shareholders to the Bondholders who are paid first during liquidation.
