Subordination agreement is a contract which guarantees senior debt will be paid before other “subordinated” debt if the debtor becomes bankrupt. Often, debtors or companies will need to take on more debt after having a previous loan, but in many cases, the debtor cannot take on more debt without the agreement of the original creditor. The creditor usually will require the debtor to sign a subordination agreement which ensures they get paid before other creditors, ensuring they are not taking on high risks. The debtor then may be able to get other loans from creditors who are willing to give the risky loan because they can charge a much higher interest rate.
[Last updated in September of 2021 by the Wex Definitions Team]