Subordinated Debt

Subordinated debt is a type of debt that is secured by a collateral that is subordinate to a senior debt. This means that if the borrower defaults on the debt, the creditor with senior debt will be paid first before the creditor with subordinated debt.

Examples of subordinated debt:

• Second mortgage on a house
• Junior lien on a car
• Credit card debt

Key factors that determine subordination:

• Nature of the collateral: The type of collateral used for the debt is a major factor in determining subordination. For example, a mortgage is generally considered to be more secure than a credit card debt, therefore subordinate debt is secured by a second mortgage is more subordinate than a first mortgage.
• Senior debt level: The amount of senior debt that already exists on the collateral is a major factor in determining subordination. If there is a high amount of senior debt, the subordinated debt is more likely to be subordinate.
• Priority of debt: The order in which debts are paid off is determined by the priority of the debt. Subordinated debt is paid off after senior debt has been paid off.

Subordinated debt can be a risky investment because it is more likely to be lost in a bankruptcy or foreclosure. However, subordinated debt can also be a more affordable way to borrow money if the borrower has a good credit score.