What is an 'Absolute Priority'

Absolute priority is a rule that stipulates the order of payment in the event of corporate liquidation among creditors and shareholders. The absolute priority rule is used in corporate bankruptcies to decide what portion of payment will be received by which participants. Debts to creditors will be paid first and shareholders divide what remains. Absolute priority also applies to individuals, who face liquidation of their assets to settle claims. Secured always takes precedence over unsecured claims.

Regarding the estate of a deceased person, the absolute priority rule will ensure payment of outstanding debts before the distribution to beneficiaries.

Also known as "liquidation preference."

BREAKING DOWN 'Absolute Priority'

Under Section 1129(b)(2) of the U.S. Bankruptcy Code, a liquidation plan must be "fair and equitable" to creditors. Setting aside certain provisions to handle back wages and benefits and tax claims, absolute priority specifies the pecking order to carry out the directive for fair and equitable treatment. Senior creditors are paid in full before junior creditors unless the senior creditors consent to subordinate some of their claims to unsecured creditors. After the claims of junior creditors are satisfied, any remaining funds or assets are handed over to equity holders.

In estate cases, if the resources of the estate are insufficient to pay off the debts, assets will need to be liquidated to handle the obligations.

Courts Intervene to Affirm Absolute Priority

In some litigated cases, courts have had to affirm the absolute priority rule. Such cases involved cooperation between certain creditors and debtors who sought to exclude sets of other claimants from liquidation proceeds. The courts hearing these cases deemed that secured creditors must be paid first, then unsecured creditors, and finally equity holders if any assets remain. Unless extraordinary circumstances exist or if secured creditors consent otherwise, no prearrangements are allowed to break this sequence.

RELATED TERMS
  1. Notice To Creditors

    A public notice to the creditors and debtors of an estate. The ...
  2. Liquidation

    Liquidation is the process of bringing a business to an end and ...
  3. Unsecured Creditor

    An individual or institution that lends money without obtaining ...
  4. Cram-Up

    A situation in which junior classes of creditors impose a cram-down ...
  5. Liquidation Preference

    Liquidation preference is a term used in contracts to specify ...
  6. Creditor Nation

    A nation with a cumulative balance of payment surplus. A creditor ...
Related Articles
  1. Personal Finance

    Fighting Back Against Collection Lawsuits

    There are still options available to those being pursued by a creditor.
  2. Financial Advisor

    Corporate bankruptcy: An overview

    When public company files for corporate bankruptcy, the bondholders are first in line to receive their share back. Equity holders on the other hand, are second in line to bondholders when a corporate ...
  3. Personal Finance

    7 Tips For The Do-It-Yourself Debt Manager

    Hired gun not in your budget? Learn to be your own credit counselor.
  4. Investing

    Equity Stripping Leaves Creditors Empty-Handed

    Add additional debt to your real estate assets to keep the creditors at bay.
  5. Personal Finance

    Unemployed? 5 Smart Ways to Get Control of Debt

    When you're unemployed and barely making ends meet, smart debt advice can help you stay on top of your payments and protect your credit rating.
  6. Small Business

    Whom Should Corporations Please?

    Companies balance the interests of owners, customers and employees. Find out who comes out on top.
  7. Investing

    Understanding Financial Liquidity

    Understanding how this measure works in the market can help keep your finances afloat.
  8. Insights

    Basic Concept Of Absolute Advantage

    Absolute advantage is the ability of an individual, country or company to produce a good or service at a lower cost than any competitor. An entity with an absolute advantage requires fewer inputs ...
RELATED FAQS
  1. Under what circumstances might a company decide to liquidate?

    Learn about the circumstances under which a company may decide to liquidate, and understand how assets are liquidated in ... Read Answer >>
  2. What's the Differences Between Chapter 7 and Chapter 11?

    Chapter 7 bankruptcy is sometimes called liquidation bankruptcy, while Chapter 11 bankruptcy is called rehabilitation bankruptcy. Read Answer >>
  3. Is a Locked-in Retirement Account (LIRA) protected from creditors?

    Learn about how Canadian registered pension and retirement plans are protected from creditors under federal and provincial ... Read Answer >>
  4. How long does it take for items to show up on my credit report?

    Find out how long missed payments, collections and requests for credit take to appear on a credit report and how often creditors ... Read Answer >>
  5. What affects an asset's liquidity?

    Learn about what affects an asset's liquidity, including examples of liquid and fixed assets, and how a company's liquidity ... Read Answer >>
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  4. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
Trading Center