Subordination, in a legal sense, means ranking one claim behind another claim regarding priority. The subordinated claim is referred to as the “junior” claim, while the claim with the highest priority is referred to as “senior”.
Subordination agreements are used to rank claims against a debtor in regard to priority, if there are more than one. This means that a subordinated claim can only be collected after the ones ranked above it are collected, which becomes particularly important when a debtor owes debts to several creditors and is unable to repay on time.
If a debtor defaults on repaying their creditors, subordination agreements can be used to rank the debt. One example would be a business declaring bankruptcy:
Subordination clauses can primarily be found in mortgage refinancing agreements. If you enter into an agreement with a lender and the agreement contains a subordination clause, it usually means that this debt will stay senior to any debt incurred afterward.
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