The absolute priority rule determines:
A) when a firm must be declared officially bankrupt.
B) how a distressed firm is reorganized.
C) which judge is assigned to a particular bankruptcy case.
D) how long a reorganized firm is allowed to remain under bankruptcy protection.
E) which parties receive payment first in a bankruptcy proceeding.

Question

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The absolute priority rule determines which parties receive payment first in a bankruptcy proceeding. This rule states that priority must be given to the claims of secured creditors, then to administrative expenses, priority unsecured claims (such as taxes), and finally to general unsecured claims (such as suppliers). Any remaining funds would then go to equity holders.

The Absolute Priority Rule Determines