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Absolute Priority

The absolute priority rule comes into play when a class of similar situated creditors do not agree with the plan.

The absolute priority rule determines who should receive payment first in event of a Chapter 11 bankruptcy. It goes into effect when one or more creditors listed as a "senior" class under the rule (such as bank creditors) objects to the bankruptcy plan.

A court will only ignore the objections and approve the plan if the senior creditors that oppose the plan are paid in full and creditors that are junior to the dissenting creditor will not receive compensation under the plan.

Secured creditors will receive priority under this plan. The absolute priority rule operates to ensure that an unsecured creditor is paid in full before a shareholder is able to retain its ownership interest in a corporate debtor.

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