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Subordination is the act or process by which one person or creditor's rights or claims are ranked below those of others, dealing with the distribution priority of debts between creditors.
Lenders can execute what are referred to as executory subordination agreements. Executory subordination agreements are essentially a promise to enter into a subordination agreement in the future if another loan enters the picture, like a construction loan.
An example is a trust document that includes a subordinate clause. This requires it to state that once the primary lien becomes active, a secondary lien becomes automatically subordinate. For instance, if a trust pays education funding as a first priority, the first lien is tuition.
Subordination agreement is a contract which guarantees senior debt will be paid before other ?subordinated? debt if the debtor becomes bankrupt.
A subordination agreement must be signed and acknowledged by a notary and recorded in the official records of the county to be enforceable.
A Subordination Agreement focuses on creditor priorities and security claims, providing legal certainty to creditors when assessing repayment risk. If a credit event (or default) occurs, a subordination agreement provides a senior lender superior repayment rights than the subordinated lender.
A subordination clause is a clause in an agreement that states that the current claim on any debts will take priority over any other claims formed in other agreements made in the future.
Subordination clauses are most common in mortgage refinancing agreements, home equity loans, and HELOCs. Subordination clauses don't take effect until a second lien is made on a home.