Subordination (finance) - United States Law - Subordination of Debt

Subordination of Debt

Subordination is the process by which a creditor is placed in a lower priority for the collection of its debt from its debtor's assets than the priority the creditor previously had, In common parlance, the debt is said to be subordinated but in reality, it is the right of the creditor to collect the debt that has been reduced in priority. The priority of right to collect the debt is important when a debtor owes more than one creditor but has assets of insufficient value to pay them all in full at the time of a default. Except in bankruptcy proceedings, the creditor with the first priority for collection will have the first claim on the debtor's assets for its debt and the creditors whose rights are subordinate will thus have fewer assets to satisfy their claims. Subordination can take place by operation of law or by agreement among the creditors.

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