Absolute Priority Rule: What to Know
Sometimes in bankruptcy cases, you will hear about something known as the “absolute priority rule.” Sometimes the absolute priority rule is known as “liquidation preference” in some bankruptcy cases, and it may not necessarily affect or make a difference in your specific bankruptcy case. However, it is important to know what the absolute priority rule is and how it works. Our Oak Park bankruptcy lawyers can provide you with more information about the absolute priority rule, and we can begin working with you today on your bankruptcy case.
U.S. Bankruptcy Code and the Absolute Priority Rule
The absolute priority rule, in short, refers to the priority order of creditors and shareholders in a bankruptcy case. In other words, it is a rule concerning the order in which particular classes or categories of creditors must be repaid in a bankruptcy case. It can be applicable in some liquidation bankruptcy cases, as well as in some reorganization bankruptcies.
The terms of the absolute priority rule exist under Section 1129(b)(2) of the U.S. Bankruptcy Code, which specifies the order of payment with respect to particular classes of creditors. Generally speaking, holders of secured claims are paid first in a specific order, followed then by holders of unsecured claims, and then by shareholders and related parties.
As Westlaw explains, the absolute priority rule is “the principle of bankruptcy law requiring the claims of a dissenting class of creditors to be paid in full before any class of creditors junior to such dissenting class may receive or retain any property in satisfaction of their claims.” Several years ago, the U.S. Supreme Court heard a case, Czyzewski v. Jevic Holding Corp. (2017), in which it affirmed the absolute priority rule and the requirement that senior classes of creditors be paid in full before junior creditors can receive payment.
Absolute Priority Rule and Cramdowns in Bankruptcy Cases
Westlaw also clarifies that the absolute priority rule is important because it “prevents a plan of reorganization from being crammed down on unsecured creditors unless equity security holders, who are junior in priority to unsecured creditors, receive no distributions.” In addition, although the U.S. Bankruptcy Code does not say it outright, the absolute priority rule prevents a reorganization plan from “paying more to a class than what it is owed.”
What is a cramdown? In short, cramdowns allow the debtor to lower the total principal amount of a debt in certain bankruptcy cases to the value of the amount of the property that had secured the debt. In other words, some secured debts can be crammed down. Before you make any assumptions about how a cramdown can work or whether you can do this in your bankruptcy case, you should seek advice from a bankruptcy lawyer.
Contact Our Oak Park Bankruptcy Lawyers Today
If you have any questions about the absolute priority rule or how it could impact your bankruptcy case, it is critical to seek advice as soon as possible from an experienced Oak Park bankruptcy attorney. An advocate at our firm can evaluate your circumstances and provide you with more information about what to expect in your bankruptcy case. Contact the Emerson Law Firm to learn more about how we can assist you.
See Related Blog Posts:
Is Liquidation Bankruptcy Right for Me?
Is Now the Right Time to File for Consumer Bankruptcy?
U.S. Bankruptcy Code and the Absolute Priority Rule
The absolute priority rule, in short, refers to the priority order of creditors and shareholders in a bankruptcy case. In other words, it is a rule concerning the order in which particular classes or categories of creditors must be repaid in a bankruptcy case. It can be applicable in some liquidation bankruptcy cases, as well as in some reorganization bankruptcies.
The terms of the absolute priority rule exist under Section 1129(b)(2) of the U.S. Bankruptcy Code, which specifies the order of payment with respect to particular classes of creditors. Generally speaking, holders of secured claims are paid first in a specific order, followed then by holders of unsecured claims, and then by shareholders and related parties.
As Westlaw explains, the absolute priority rule is “the principle of bankruptcy law requiring the claims of a dissenting class of creditors to be paid in full before any class of creditors junior to such dissenting class may receive or retain any property in satisfaction of their claims.” Several years ago, the U.S. Supreme Court heard a case, Czyzewski v. Jevic Holding Corp. (2017), in which it affirmed the absolute priority rule and the requirement that senior classes of creditors be paid in full before junior creditors can receive payment.
Absolute Priority Rule and Cramdowns in Bankruptcy Cases
Westlaw also clarifies that the absolute priority rule is important because it “prevents a plan of reorganization from being crammed down on unsecured creditors unless equity security holders, who are junior in priority to unsecured creditors, receive no distributions.” In addition, although the U.S. Bankruptcy Code does not say it outright, the absolute priority rule prevents a reorganization plan from “paying more to a class than what it is owed.”
What is a cramdown? In short, cramdowns allow the debtor to lower the total principal amount of a debt in certain bankruptcy cases to the value of the amount of the property that had secured the debt. In other words, some secured debts can be crammed down. Before you make any assumptions about how a cramdown can work or whether you can do this in your bankruptcy case, you should seek advice from a bankruptcy lawyer.
Contact Our Oak Park Bankruptcy Lawyers Today
If you have any questions about the absolute priority rule or how it could impact your bankruptcy case, it is critical to seek advice as soon as possible from an experienced Oak Park bankruptcy attorney. An advocate at our firm can evaluate your circumstances and provide you with more information about what to expect in your bankruptcy case. Contact the Emerson Law Firm to learn more about how we can assist you.
See Related Blog Posts:
Is Liquidation Bankruptcy Right for Me?
Is Now the Right Time to File for Consumer Bankruptcy?
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