Absolute Priority

Absolute priority rule in bankruptcy

Absolute priority or absolute priority rule is a rule in bankruptcy, when the senior creditors must first be fully paid before less senior (or junior) creditors receive any repayment. Creditors are classified by seniority and the more senior a creditor is, the greater generally is his chance of getting the money back and the less risky his position is.

Absolute priority example

For example, if there is a company in chapter 11 bankruptcy and the only asset left is 10 million in cash and there are two creditors who claim 8 million each with different seniority, then under the absolute priority rule the more senior creditor will get the whole 8 million and the less senior one will only get the remaining 2 million.

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