Known as a bedrock principle in chapter 11 cases, the
"absolute priority rule" serves as an important
protection for creditors. In general terms, it requires senior
classes of creditors to be provided for in full before a junior
class can receive a distribution under a chapter 11 plan. While
this rule continues to apply in business chapter 11 cases, courts
are divided on whether it applies to individual chapter 11 debtors.
This issue is not a mere consumer matter, but impacts creditors who
have made loans to sole proprietorships or have loans guaranteed by
such debtors. Given the dichotomy in the courts, creditors should
understand how to navigate this issue.
A chapter 11 plan provides a distribution to classes of
creditors to satisfy their claims against the debtor. Most
creditors will have the right to vote to accept or reject the plan.
If a class of creditors does not accept the plan, the debtor must
resort to what is known as a "cram down" to
