Absolute Priority Rule

Category: legal

A bankruptcy principle stating that senior creditors must be paid in full before junior creditors or equity holders receive anything.

This is the "line of succession" for getting paid. Secured creditors (like a bank with a mortgage) are first. Priority claims (taxes, employee wages) are next. Unsecured creditors (vendors) follow. Equity holders (stock owners) are dead last, and typically get completely wiped out in corporate bankruptcies.

Common Examples

• Under the absolute priority rule, the common shareholders’ equity was canceled entirely because the unsecured bondholders were not made whole.
• The reorganization plan was rejected by the judge because it violated the absolute priority rule by distributing cash to the founders prematurely.