iLA | Deed of Subordination

Deed of Subordination

A subordination agreement is a legal document that establishes one debt as ranking behind another in priority for collecting repayment from a debtor. The priority of debts can become extremely important when a debtor defaults on payments or declares bankruptcy.

A subordination agreement acknowledges that one party’s claim or interest is superior to that of another party in the event that the borrower's assets must be liquidated to repay the debts.

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Why do I need independent legal advice?

The subordinated party will only collect on a debt owed when and if the obligation to the primary lender has been fully satisfied in the event of foreclosure and liquidation. The 'junior' or second debt is referred to as a subordinated debt. The debt which has a higher claim to the asset is the senior debt.

Lenders of senior debts have a legal right to be repaid in full before lenders of subordinated debts receive any repayments. It often happens that a debtor doesn't have enough funds to pay all debts, or foreclosure and sale doesn't produce enough in the way of liquid proceeds, so lower priority debts might receive little or no repayment at all.

And so, if you are entering into a Deed of Subordination, it is important that you understand the legal ramification and the effect it may have on you as a junior creditor.

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