As a business owner, it is important to understand the legal definition of subordination. In simple terms, subordination refers to a lien or claim that is weaker than another lien or claim. This means that the weaker lien or claim will only be honored after the stronger lien or claim has been satisfied.

To better understand this concept, let’s consider an example. Imagine that you own a property and have taken out two loans against it. The first loan is a mortgage, which is secured by the property itself. The second loan is a personal loan, which is not secured by any collateral. In this scenario, the mortgage is the stronger lien or claim, while the personal loan is the weaker lien or claim.

If you were to default on both loans, the mortgage lender would have the first right to the property. This means that they would be able to foreclose on the property and sell it to recoup their losses. Only after the mortgage lender has been fully satisfied would the personal loan lender be able to make a claim on any remaining assets.

Understanding subordination is important for business owners who may need to take out multiple loans or lines of credit. By understanding which liens or claims are stronger, you can better prioritize your debts and ensure that you are meeting your obligations in the correct order.

It is also important to note that subordination can be voluntary or involuntary. Voluntary subordination occurs when a lender agrees to subordinate their lien or claim to another lender’s lien or claim. This is often done to help a borrower secure additional financing. Involuntary subordination, on the other hand, occurs when a lien or claim is automatically subordinated by law.

Talk to a Fitter Law attorney: understanding the legal definition of subordination is crucial for business owners who may need to take out multiple loans or lines of credit. By prioritizing your debts and understanding which liens or claims are stronger, you can ensure that you are meeting your obligations in the correct order. Whether voluntary or involuntary, subordination plays an important role in the world of finance and should not be overlooked

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