What is Subordinated Debt?

Subordinated debt is debt that is ranked lower than primary debt. For example, in a bankruptcy, the court will repay the primary debt first and use what is left over to pay subordinate debt. All of your debt is ranked according to priority, and the court goes down the list until the cash runs out. Not every lender will recoup their capital and that is why second, third and fourth loans are riskier than first mortgages.

What it Means for Lenders

If you are the lender, you need to look out for your best-interest to ensure you get paid if a bankruptcy occurs. Usually bank loans are first in line. Private loans tend to get the last priority. If you are extending a private loan, formalize a contract with the help of an attorney. Verbal agreements, memorandums or non-notarized contracts will not likely hold up in court against formal bank debt notices.