What is equitable subordination?

Equitable subordination is a concept of creditors’ rights law in Tennessee that deals with the priority of repayment of debts. In Tennessee, when a borrower defaults on a loan, the lender has legal recourse to collect what is owed. The law allows the lender to “subordinate” certain debts to make sure that they are repaid first. This means that if the borrower has multiple debts, they must pay off the debts that have been subordinated first before they can pay any other debts. With equitable subordination, the lender can require that certain creditors, usually shareholder loans or insider loans, be subordinated to the lender’s loan. This means that if the borrower doesn’t have enough money to pay off all of their debts, the lender’s loan will take priority and be paid before any other debts. Equitable subordination allows creditors to be sure that their loans are paid back first if the borrower defaults, and it gives them a measure of protection against other creditors who may be vying for the same funds. It also prevents borrowers from taking advantage of certain insiders or shareholders by giving them preferential treatment over other creditors. In Tennessee, equitable subordination is an important tool that creditors can use to protect their interests and make sure they get repaid.

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What is equitable subordination?

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