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SECURED CLAIMS IN BANKRUPTCY: ON THE DESIGN OF PARTIAL-PRIORITY RULES 2

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The three partial priority rules can be summarized as follows: Under the “fixed-fraction priority rule,” a fixed fraction of the collateral backing secured claims would be made available to pay the claims of unsecured creditors. The “adjustable-priority rule” accords secured claims priority only over the claims of nonadjusting creditors. Finally, under the “consensual priority rule,” secured claims would have priority only over the claims of creditors that had explicitly consented to subordination.

We wish to emphasize that none of these partial-priority rules would be superior in every respect to the rule of full priority. There will be efficiency costs associated with these rules or any rule of partial priority. Thus, although some commentators have read The Uneasy Case as advocating adoption of a partial priority rule, we tried to make clear in our earlier paper and will restate here that, at this point, we merely think that these rules should be considered with an open mind as alternatives to full priority.

Before proceeding with descriptions of these rules, we also must re-emphasize three points. First, the purpose of these rules is not to protect unsecured creditors, although all of these rules might have the effect of making certain groups of unsecured creditors, such as involuntary creditors and unsophisticated creditors that do not set their interest rate to reflect the risk of loss from the borrower’s failure and the subordination of their claims (e.g., customers and employees), better off. The purpose of these rules is to reduce the efficiency costs associated with full priority.
Second, although some commentators have characterized the two rules we put forward in The Uneasy Case as “a subordination scheme,” none of these rules subordinates the claims of secured creditors to those of unsecured creditors: under all three of the rules secured claims would receive at least as much as unsecured claims. Indeed, neither of the two rules we considered in The Uneasy Case would completely eliminate the priority accorded to secured claims in bankruptcy. Rather, these partial priority rules would affect only the degree to which the secured creditor enjoys priority in its collateral over unsecured creditors when the debtor enters bankruptcy. Electronic Payday Loans Online

This post was written by , posted on September 7, 2014 Sunday at 4:25 pm