What is the absolute priority rule?

In situations where the assets need to be disposed of to handle outstanding obligations, there must be clear who will receive any benefits that they will reach from the sale. Here comes the concept of the rule of absolute priority. The absolute priority rule in principle confirms that any creditors' claims must be honored and settled before any of the remaining assets are distributed between shareholders. Ensuring the absolute priorities of any creditors' claims help to ensure that debtors who go through the reorganization of debt or even bankruptcy will have a chance to regain financial health in the future.

The most common application of the rules for absolute priority occurs during the liquidation of an asset of a business entity who decided to submit bankruptcy. Once the assets are converted into cash, bankruptcy judges the creditor's claims and then determines the amount of the payment that each of the creditors receives, asIle will be disposed of by all assets. It is a process that can only take a few weeks, although finally debt settlement may take years. However, the rule of absolute priority ensures that creditors will eventually receive at least partial payment, not if in full. During this process, shareholders will not receive anything in the way of financial profits from the sale of assets. Only after the company's debts are settled to the satisfaction of the court in jurisdiction will investors begin to see any return.

The rule of absolute priority is also often caused when settling estates after the owner's death. The bailiff is accused of liability for the settlement of all outstanding debts from the resources of the estate. If cash reserves are sufficient to pay all creditors, then the task is simple. If not, other assets would have to be cfated in cash and used to settle debts. At this point, the rest of the estate could be distributed to the deceased.

The rule for absolute priority provides deliverylumins and other types of institutions some degree of protection that expand the loan to goods and services to individuals and businesses. The advantage for consumers is that the application of the rules of absolute priority helps prepare a way for recovering from a devastating financial situation and also to create an opportunity to build something new without preventing problems associated with the previous company.