What Is the Arizona Bankruptcy Absolute Priority Rule?

absolute priority rule Understanding some bankruptcy and debt-related terminology will make it much easier for you to figure out the impact such proceedings are going to have on your life. The absolute priority rule is one such concept you’ll need to familiarize yourself with in the case of relatively complex corporate bankruptcies.

The Absolute Priority Rule Defined

The absolute priority rule stipulates the order of payment in the event of corporate liquidation. It applies to business bankruptcies (Chapter 11) and it states that a creditor’s claim has absolute priority over the claim of a shareholder.

During the liquidation of assets in a bankruptcy, the investors will be compensated solely after the respective creditor claims are settled.

According to the absolute priority rule, priority creditors will have to be paid in full. This rule will be invoked only in cases when the court confirms a plan over objections of a class that the plan isn’t fair to.

A Deeper Look at the Rule

US Bankruptcy Code 1129(b)(2) provides more information about the absolute priority bankruptcy rule and its implications in the case of corporate asset liquidation.

According to the code, a liquidation has to be fair and equitable to the creditors. Senior creditors are always to be paid in full before everyone else unless they consent to change the order.

Next are the junior creditors. Once their claims have been satisfied, remaining funds or assets will be distributed among the equity holders.

Depending on the situation, an Arizona court may have to interfere in the bankruptcy proceedings in order to affirm the absolute priority rule. Usually, such proceedings are needed whenever creditors and debtors enter an arrangement aimed at excluding certain claimants from the liquidation proceedings.

The court will examine the specifics of the situation, making sure that secured creditors are paid off first. Unsecured creditors and equity holders will follow in that order. Unless the secured creditors agree to an exception, this order cannot be changed.

Does the Rule Apply to Individual Debtors?

The absolute priority bankruptcy rule applies to Chapter 11 debtors in Arizona and the US.

As a part of a Chapter 11 filing, creditors will be divided into several different classes. The debtor has to propose a reorganization plan that will address each of the classes individually. The creditors have to approve the plan and if they disagree with it, the absolute priority rule will be applied.

There are questions, however, about the application of the absolute priority rule in the case of individual Chapter 11 bankruptcy filings.

Chapter 11 bankruptcy isn’t just for corporations. Individuals can also go through the filing process, especially if they somehow cannot qualify for a Chapter 13 filing.

Courts in the US have not had a unanimous position concerning the applicability of the absolute priority rule in individual Chapter 11 filings.  According to some judges, there’s an exemption for individuals since 11 U.S.C.                 1129(b)(2) states that a holder of any claim that is junior to the claims of the respective class will not have the claim fulfilled, except for cases in which the debtor is an individual. In such instances, the debtor may retain property included in the estate.

Additionally, the code states that an individual debtor will remain in possession of all property of the estate in a Chapter 11 filing.

On the other hand, several bankruptcy courts in the US have ruled out that the rule does apply to individual filings.

The absolute priority rule is an absolute essential when it comes to what the debtor gets to keep in the case of the sometimes complex Chapter 11 bankruptcies. Depending on the circumstances, however, the rule could contribute to some additional complications.

If you’re facing a Chapter 11 filing, it’s imperative to consult an experienced Arizona bankruptcy attorney. Being represented by a professional in the case will ensure the best possible outcome and debt relief.

Click here for information on Arizona bankruptcy laws Chapter 7.