ABSOLUTE PRIORITY RULE Meaning and
Definition
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The absolute priority rule is a legal principle in bankruptcy law that governs the order in which creditors are paid during a bankruptcy proceeding. According to this rule, creditors with higher priority must be paid in full before those with lower priority receive any payment. The absolute priority rule typically applies to Chapter 11 bankruptcy cases and ensures that the rights of both secured and unsecured creditors are protected.
Under the absolute priority rule, secured creditors, such as lenders with collateral, are given the highest priority. They are entitled to receive the full value of their claim before any other creditors receive payment. If there are any remaining assets or funds after satisfying the claims of secured creditors, unsecured creditors with higher priority, such as government entities or employees, are next in line for payment.
If there is still any money left after paying all the higher priority creditors, then the claims of lower priority unsecured creditors, such as suppliers or vendors, will be addressed. However, if there are insufficient funds to fully pay all the creditors in a particular priority level, they will be paid proportionately based on the value of their claim.
The absolute priority rule prevents the debtor or the bankruptcy court from disregarding the rights of higher priority creditors by prioritizing the claims of lower priority creditors. It ensures fairness and transparency by establishing a clear order of priority for payment in the bankruptcy process.
