How to Subordinate Claims During Automatic Stay As a Creditor
Hire a lawyer., Ensure the agreement will be enforceable., Discuss your options with other creditors., Start with basic information., Summarize the agreement., Detail the subordination., Provide information about how payments will be made., Outline...
Step-by-Step Guide
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Step 1: Hire a lawyer.
Before you ever consider subordinating one of your own claims or asking another creditor to subordinate theirs, you need to talk to an experienced financial and bankruptcy lawyer.
A well-qualified lawyer will be able to talk you through the benefits and drawbacks of signing a subordination agreement, as well as the steps for executing the agreement.
Start by asking friends and family for lawyer recommendations.
Most lawyers make a living off referrals and it can be a great way to find a great lawyer.
If you cannot find a quality recommendation, contact your state bar's lawyer referral service.
After answering a few general questions about your legal issue, you will be put in contact with various qualified lawyers in your area. -
Step 2: Ensure the agreement will be enforceable.
As soon as you hire a lawyer, talk to them about what you want to accomplish.
Mention that you think using a subordination agreement would be a great option.
Subordination agreements are binding contracts that rank the debts of specific creditors.
This ranking becomes incredibly important during bankruptcy proceeding because debts with a higher rank get paid off first.Under the Bankruptcy Code, a subordination agreement is fully enforceable so long as it is unambiguous and properly executed.However, because you will be (or are) in an automatic stay, the court may interpret the execution of a subordination agreement as a violation of that stay.
Make sure your lawyer feels confident in the agreement's enforceability before you draft and execute it. , If you and your lawyer feel confident that a subordination agreement will be enforceable, you and other creditors must discuss how you want the agreement set up.
Most creditors will want their claims to have the highest priority possible.
This will allow their claims to be paid out first by the debtor.
Therefore, you will need to find a valid reason to request that your claim jump other claims that are currently ahead of you.
Common reasons for subordinating a claim include the refinancing of a loan and creditor wrongdoing.
When a creditor offers a loan on property that has already had one or more loans associated with it, the newest creditor will often require (as a prerequisite to making the loan) the more senior creditors to subordinate their claims.
This helps the newest creditor feel at ease about making the loan, because they know if something happens their money will be paid back first.
The most common example of this is with mortgages.Sometimes a creditor acts improperly by breaching a fiduciary duty or by doing something that causes damage to you and other creditors.
In this circumstance, the creditor that has harmed you might be subject to equitable subordination, which will leave the priority of claims up to the judge.As a way of remedying the improper act, you might ask the judge in a bankruptcy case if you can work with all the creditors to come up with a claim priority on your own. , If you and other creditors can agree on the terms of a subordination agreement, you (and your lawyer) should offer to draft it.
Being able to draft an agreement gives you the power to ensure it is created up to your standards.
When you or your lawyer begin drafting, start with the following information:
A title (e.g., "Subordination Agreement") The date of execution (e.g., "This Agreement made as of September 10, 2016) A description of the parties (e.g., "Donald Gene, an individual residing at and Alyce Ann, an individual residing at ") , Every contract has to have some exchange of consideration (i.e., something of some value).
In a subordination agreement entered into at this stage of bankruptcy proceedings, the consideration you offer will usually be the withholding of filing a motion for equitable subordination.
The consideration the other creditor will offer is the subordination of their claim to yours.
This exchange should be summarized near the beginning of the agreement.
For example, your summary could read: "In consideration of Donald Gene not filing a motion for equitable subordination, Alyce Ann agrees to subordinate her claim in the manner agreed to below"., The first substantive paragraph of your subordination agreement needs to lay out exactly what interests are being subordinated and what interests are gaining priority.
The security interests need to be defined with enough detail so a court can identify what you are talking about.
For example, do not say, "Junior creditor subordinates the mortgage." A court will not be able to identify what mortgage you are talking about, or how it will be subordinated.
Instead, consider saying something like: "Junior creditor hereby subordinates any and all security interests of the Junior Creditor in any of the Debtor's personal property and assets (the specific assets at question are outlined in Exhibit A), in favor of such loan and any other indebtedness, present or future, of Debtor to Senior Creditor."
Your next provision should clearly state how the subordination will work and how the new junior creditor will be paid.
In most cases, you (as the new senior creditor) will require that your interest be paid off entirely before the junior creditor can get paid at all.
In other circumstances, you may allow the new junior creditor to collect a certain dollar amount as consideration for entering into the agreement.
For example, one option might be to draft your provision as follows: "It is agreed that until Senior Creditor has been paid in full by Debtor, no payments, in cash or other property, shall be made by Debtor or received by Junior Creditor." Another option may be the following: "It is agreed that until Senior Creditor has been paid in full by Debtor, no payments, in cash or other property, shall be made by Debtor or received by Junior Creditor, except Senior Creditor hereby consents to payment by Debtor to Junior Creditor in the amount of $50,000 immediately prior to Debtor paying Senior Creditor in full."
The last substantive provision needs to ensure the junior creditor will not implement any enforcement actions to try and collect their debt before you.
This usually means the junior creditor will need to agree not to ask the debtor for payment, enforce any right they have to collect the money, or join any legal action to ask for the money.
For example, this provision might read as follows: "The Junior Creditor will not (i) make any demand for payment of or take any action to accelerate any Junior Indebtedness, (ii) seek to collect payment of, or enforce any right or remedies against the Borrower related to or supporting any of the Junior Indebtedness, (iii) commence or join with any other creditor in commending any action against the Borrower arising from or relating to the Junior Indebtedness."
Boilerplate language is a term used to describe language in a contract that does not touch on the substance of your contract, but instead touches on the enforceability and administration of the contract as a whole.
This language is incredibly important to have in cases where your contract is challenged in court.
This language will tell the court how the contract should be interpreted, what laws should apply, and how a dispute should be resolved.
Examples of common boilerplate provisions include:
Indemnity Validity Amendments Waiver of notices Governing law , At the end of your agreement, make sure there is room for every party to sign.
At the top of your signature page, write the following: "In witness whereof, the parties hereto have each duly executed and delivered this subordination agreement as of the date first written above."
Pass the original copy of the agreement around and get it signed by every party.
Once every party has signed the agreement, it will have been executed and it will be enforceable. -
Step 3: Discuss your options with other creditors.
-
Step 4: Start with basic information.
-
Step 5: Summarize the agreement.
-
Step 6: Detail the subordination.
-
Step 7: Provide information about how payments will be made.
-
Step 8: Outline enforcement measures.
-
Step 9: Add boilerplate language.
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Step 10: Leave space for signatures.
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Step 11: Execute the contract.
Detailed Guide
Before you ever consider subordinating one of your own claims or asking another creditor to subordinate theirs, you need to talk to an experienced financial and bankruptcy lawyer.
A well-qualified lawyer will be able to talk you through the benefits and drawbacks of signing a subordination agreement, as well as the steps for executing the agreement.
Start by asking friends and family for lawyer recommendations.
Most lawyers make a living off referrals and it can be a great way to find a great lawyer.
If you cannot find a quality recommendation, contact your state bar's lawyer referral service.
After answering a few general questions about your legal issue, you will be put in contact with various qualified lawyers in your area.
As soon as you hire a lawyer, talk to them about what you want to accomplish.
Mention that you think using a subordination agreement would be a great option.
Subordination agreements are binding contracts that rank the debts of specific creditors.
This ranking becomes incredibly important during bankruptcy proceeding because debts with a higher rank get paid off first.Under the Bankruptcy Code, a subordination agreement is fully enforceable so long as it is unambiguous and properly executed.However, because you will be (or are) in an automatic stay, the court may interpret the execution of a subordination agreement as a violation of that stay.
Make sure your lawyer feels confident in the agreement's enforceability before you draft and execute it. , If you and your lawyer feel confident that a subordination agreement will be enforceable, you and other creditors must discuss how you want the agreement set up.
Most creditors will want their claims to have the highest priority possible.
This will allow their claims to be paid out first by the debtor.
Therefore, you will need to find a valid reason to request that your claim jump other claims that are currently ahead of you.
Common reasons for subordinating a claim include the refinancing of a loan and creditor wrongdoing.
When a creditor offers a loan on property that has already had one or more loans associated with it, the newest creditor will often require (as a prerequisite to making the loan) the more senior creditors to subordinate their claims.
This helps the newest creditor feel at ease about making the loan, because they know if something happens their money will be paid back first.
The most common example of this is with mortgages.Sometimes a creditor acts improperly by breaching a fiduciary duty or by doing something that causes damage to you and other creditors.
In this circumstance, the creditor that has harmed you might be subject to equitable subordination, which will leave the priority of claims up to the judge.As a way of remedying the improper act, you might ask the judge in a bankruptcy case if you can work with all the creditors to come up with a claim priority on your own. , If you and other creditors can agree on the terms of a subordination agreement, you (and your lawyer) should offer to draft it.
Being able to draft an agreement gives you the power to ensure it is created up to your standards.
When you or your lawyer begin drafting, start with the following information:
A title (e.g., "Subordination Agreement") The date of execution (e.g., "This Agreement made as of September 10, 2016) A description of the parties (e.g., "Donald Gene, an individual residing at and Alyce Ann, an individual residing at ") , Every contract has to have some exchange of consideration (i.e., something of some value).
In a subordination agreement entered into at this stage of bankruptcy proceedings, the consideration you offer will usually be the withholding of filing a motion for equitable subordination.
The consideration the other creditor will offer is the subordination of their claim to yours.
This exchange should be summarized near the beginning of the agreement.
For example, your summary could read: "In consideration of Donald Gene not filing a motion for equitable subordination, Alyce Ann agrees to subordinate her claim in the manner agreed to below"., The first substantive paragraph of your subordination agreement needs to lay out exactly what interests are being subordinated and what interests are gaining priority.
The security interests need to be defined with enough detail so a court can identify what you are talking about.
For example, do not say, "Junior creditor subordinates the mortgage." A court will not be able to identify what mortgage you are talking about, or how it will be subordinated.
Instead, consider saying something like: "Junior creditor hereby subordinates any and all security interests of the Junior Creditor in any of the Debtor's personal property and assets (the specific assets at question are outlined in Exhibit A), in favor of such loan and any other indebtedness, present or future, of Debtor to Senior Creditor."
Your next provision should clearly state how the subordination will work and how the new junior creditor will be paid.
In most cases, you (as the new senior creditor) will require that your interest be paid off entirely before the junior creditor can get paid at all.
In other circumstances, you may allow the new junior creditor to collect a certain dollar amount as consideration for entering into the agreement.
For example, one option might be to draft your provision as follows: "It is agreed that until Senior Creditor has been paid in full by Debtor, no payments, in cash or other property, shall be made by Debtor or received by Junior Creditor." Another option may be the following: "It is agreed that until Senior Creditor has been paid in full by Debtor, no payments, in cash or other property, shall be made by Debtor or received by Junior Creditor, except Senior Creditor hereby consents to payment by Debtor to Junior Creditor in the amount of $50,000 immediately prior to Debtor paying Senior Creditor in full."
The last substantive provision needs to ensure the junior creditor will not implement any enforcement actions to try and collect their debt before you.
This usually means the junior creditor will need to agree not to ask the debtor for payment, enforce any right they have to collect the money, or join any legal action to ask for the money.
For example, this provision might read as follows: "The Junior Creditor will not (i) make any demand for payment of or take any action to accelerate any Junior Indebtedness, (ii) seek to collect payment of, or enforce any right or remedies against the Borrower related to or supporting any of the Junior Indebtedness, (iii) commence or join with any other creditor in commending any action against the Borrower arising from or relating to the Junior Indebtedness."
Boilerplate language is a term used to describe language in a contract that does not touch on the substance of your contract, but instead touches on the enforceability and administration of the contract as a whole.
This language is incredibly important to have in cases where your contract is challenged in court.
This language will tell the court how the contract should be interpreted, what laws should apply, and how a dispute should be resolved.
Examples of common boilerplate provisions include:
Indemnity Validity Amendments Waiver of notices Governing law , At the end of your agreement, make sure there is room for every party to sign.
At the top of your signature page, write the following: "In witness whereof, the parties hereto have each duly executed and delivered this subordination agreement as of the date first written above."
Pass the original copy of the agreement around and get it signed by every party.
Once every party has signed the agreement, it will have been executed and it will be enforceable.
About the Author
Patricia Torres
Experienced content creator specializing in lifestyle guides and tutorials.
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