Debt Subordination Agreement Template: Priority & Terms

DEBT SUBORDINATION AGREEMENT FAQ

What is a Debt Subordination Agreement?

A Debt Subordination Agreement is a legal document where one lender agrees that their claim to a borrower's assets will be ranked below another lender's claim in case of default or bankruptcy. This establishes a clear repayment hierarchy.

Why is a Debt Subordination Agreement important?

It protects senior lenders by giving them priority in repayment and helps borrowers secure additional financing. It also reduces disputes between creditors by setting legally binding repayment rules.

When should you use a Debt Subordination Agreement?

Use this agreement when multiple lenders are involved in financing the same borrower, especially in mergers, acquisitions, or refinancing situations where debt priority matters.

What should a Debt Subordination Agreement include?

It should include details of the parties involved, the subordinated and senior debts, repayment terms, restrictions on the subordinated lender, and default provisions.

Who benefits from this agreement?

Senior creditors benefit from reduced risk, while borrowers benefit by attracting new financing. Subordinated creditors may gain access to lending opportunities they wouldn’t otherwise have without agreeing to subordination.

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