Colin Coburn

Document Type

Research Memorandum

Publication Date




In recent years, a debate has been raging over whether the absolute priority rule in applies to individual chapter 11 debtors. Essentially, the absolute priority rule dictates that junior creditors cannot retain anything under a plan if an objecting senior creditor is not paid in full. If each class of creditor does not consent to a plan of reorganization, a bankruptcy court can still confirm the plan if it meets statutory requirements and is deemed “fair and equitable.” This method of confirmation is known as a “cramdown.” In order for a plan to be “fair and equitable,” it must, among other things, satisfy the absolute priority rule. The absolute priority rule states that the claims of a class of dissenting unsecured creditors must be satisfied in full before debtors can retain any property. Before Congress passed the Bankruptcy Prevention and Consumer Protection Act (BAPCPA), there was a general consensus among bankruptcy courts and scholars that the absolute priority rule applied to individuals. This consensus, however, was called into question when Congress passed BAPCPA. The absolute priority rule, codified in 11 U.S.C. §1129(b)(2)(B)(ii) states: “[w]ith respect to a class of unsecured claims…the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section” (emphasis added). The emphasized language was added to the statute as part of the Bankruptcy Prevention and Consumer Protection Act (“BAPCPA”).


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