Absolute Priority Rule

There are many misconceptions about which debts can be discharged in a Chapter 11 bankruptcy filing. Some people think they can discharge all debts and still maintain ownership of their business. Others think that they will not be able to discharge any debts due to the absolute priority rule. 

At the Orantes Law Firm in Los Angeles, our lawyers are dedicated to helping business owners throughout Southern California obtain relief from debts. We offer a free initial consultation to look at the tax debt problems you face and give you honest answers about your rights and options.

What Is the Absolute Priority Rule?

The absolute priority rule is an order of payments when a business files Chapter 11 bankruptcy. Under the rule, certain creditors must be paid in full before any other creditors receive any payments: 

  • Secured creditors must be paid before unsecured creditors
  • Unsecured creditors must be paid before owners and shareholders
  • Preferred shareholders must be paid before common shareholders

There are ways that owners can protect their interests in a business. For example, if a business is sold, the owner may negotiate an employment agreement with the new owners. If a business entity is dissolved, the absolute priority rule may not apply. 

Because the rules are complex, it’s important to consult an experienced Chapter 11 lawyer to find out which debts can be discharged and which debts must be paid under the absolute priority rule.

Contact Our Los Angeles Chapter 11 Bankruptcy Attorneys 

For more information about the absolute priority rule in Chapter 11 bankruptcy, call (213) 340-0534 or contact us by e-mail to schedule a free initial consultation. Se habla español.