BROWSE

Absolute Priority

What is an 'Absolute Priority'

An absolute priority is a rule that stipulates the order of payment - creditors before shareholders - in the event of liquidation. The absolute priority rule is used in bankruptcies to decide what portion of payment will be received by which participants. Debts to creditors will be paid first and shareholders (partial owners) divide what remains.

Explaining 'Absolute Priority'

Absolute priority specifies the pecking order. Senior creditors always get first grabs at the proceeds from liquidation, and shareholders are the last to get paid. This rule provides a degree of protection to creditors in the event of insolvency or death. The division of benefits (cash) is not always the result of a bankruptcy. It can also occur due to the liquidation of assets in order to pay down a company's liabilities.


Further Reading


Ex ante costs of violating absolute priority in bankruptcy
onlinelibrary.wiley.com [PDF]
… and Finance, Harvard Law School; Research Associate, National Bureau of Economic Research … Science Foundation and the Harvard John M. Olin Center for Law, Economics, and Business … of companies in financial distress to extract deviations from absolute priority (AP)‐that …

Absolute priority rule violations and risk incentives for financially distressed firmsAbsolute priority rule violations and risk incentives for financially distressed firms
www.jstor.org [PDF]
… and Finance, Harvard Law School; Research Associate, National Bureau of Economic Research … Science Foundation and the Harvard John M. Olin Center for Law, Economics, and Business … of companies in financial distress to extract deviations from absolute priority (AP)‐that …

Management's incentives, equity's bargaining power, and deviations from absolute priority in Chapter 11 bankruptciesManagement's incentives, equity's bargaining power, and deviations from absolute priority in Chapter 11 bankruptcies
www.jstor.org [PDF]
… and Finance, Harvard Law School; Research Associate, National Bureau of Economic Research … Science Foundation and the Harvard John M. Olin Center for Law, Economics, and Business … of companies in financial distress to extract deviations from absolute priority (AP)‐that …

Agency problems of debt, convertible securities, and deviations from absolute priority in bankruptcyAgency problems of debt, convertible securities, and deviations from absolute priority in bankruptcy
www.journals.uchicago.edu [PDF]
… and Finance, Harvard Law School; Research Associate, National Bureau of Economic Research … Science Foundation and the Harvard John M. Olin Center for Law, Economics, and Business … of companies in financial distress to extract deviations from absolute priority (AP)‐that …

The importance of deviations from the absolute priority rule in Chapter 11 bankruptcy proceedingsThe importance of deviations from the absolute priority rule in Chapter 11 bankruptcy proceedings
www.jstor.org [PDF]
… and Finance, Harvard Law School; Research Associate, National Bureau of Economic Research … Science Foundation and the Harvard John M. Olin Center for Law, Economics, and Business … of companies in financial distress to extract deviations from absolute priority (AP)‐that …

Absolute priority rule violations, credit rationing, and efficiencyAbsolute priority rule violations, credit rationing, and efficiency
www.sciencedirect.com [PDF]
… and Finance, Harvard Law School; Research Associate, National Bureau of Economic Research … Science Foundation and the Harvard John M. Olin Center for Law, Economics, and Business … of companies in financial distress to extract deviations from absolute priority (AP)‐that …

Pricing the risk of recovery in default with absolute priority rule violationPricing the risk of recovery in default with absolute priority rule violation
www.sciencedirect.com [PDF]
… and Finance, Harvard Law School; Research Associate, National Bureau of Economic Research … Science Foundation and the Harvard John M. Olin Center for Law, Economics, and Business … of companies in financial distress to extract deviations from absolute priority (AP)‐that …

Bankruptcy, absolute priority, and the pricing of risky debt claimsBankruptcy, absolute priority, and the pricing of risky debt claims
www.sciencedirect.com [PDF]
… and Finance, Harvard Law School; Research Associate, National Bureau of Economic Research … Science Foundation and the Harvard John M. Olin Center for Law, Economics, and Business … of companies in financial distress to extract deviations from absolute priority (AP)‐that …

Much ado about nothing: Absolute priority deviations in chapter 11Much ado about nothing: Absolute priority deviations in chapter 11
www.jstor.org [PDF]
… and Finance, Harvard Law School; Research Associate, National Bureau of Economic Research … Science Foundation and the Harvard John M. Olin Center for Law, Economics, and Business … of companies in financial distress to extract deviations from absolute priority (AP)‐that …



Q&A About Absolute Priority


Who are junior creditors?

Junior creditors are those who get paid last.

?

Another type of creditor that has absolute priority is unsecured creditors.

What happens when there is no absolute priority rule?

Shareholders may be able to take more than their share, leaving less for other parties involved.

What does a person have to do in estate cases?

A person has to liquidate assets of an estate if there are not enough resources to pay off debts.

Are all secured and unsecured creditors treated equally under the law ?

No, they are not treated equally under the law .

How many types of creditors have absolute priority?

There are two types of creditors that have absolute priority.

What is one type of creditor that has absolute priority?

One type of creditor that has absolute priority is secured creditors.

Why aren't all secured and unsecured creditors treated equally under the law ?

Because some secured and unsecured creditors get paid before others when there isn't enough money for everyone .

Who has priority over other creditors in estate cases?

Creditors with absolute priority have first claim on assets of an estate.

How does an absolute priority rule protect senior and junior creditors?

The absolute priority rule protects senior and junior creditors by making sure they receive what they're owed before any other party involved in the bankruptcy or liquidation process receives anything.

What is absolute priority?

Absolute priority is a rule that stipulates the order of payment - creditors before shareholders - in the event of liquidation.

Who are senior creditors?

Senior creditors are those who get paid first.

Which category does this paragraph fall into ?

This paragraph falls into Category #1 because it explains how people should act in certain situations .

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