The uneasy case for the priority of secured claims in bankruptcy

In this Article, Professor Bebchuck and Mr Fried reexamine a longstanding principle of bankruptcy law: that secured claims are entitled to be paid ii; full before unsecured claims receive any payment. There is a widespread consensus among legal scholars and economists that according full priority to secured claims is desirable because it promotes economic efficiency. This Article's analysis, however demonstrates that full priority actually distorts the arrangements negotiated between commercial borrowers and their creditors, producing various efficiency costs. The Article suggests that according only partial priority to secured claims could eliminate or reduce these efficiency costs-and that such an approach might well be superior to the rule of full priority The analysis also suggests that a mandatory rule of partial priority could be effectively implemented within the framework of existing bankruptcy law, and that such an approach would be consistent with fairness and freedom of contract considerations. The Article therefore presents two different rules of partial priority that should be considered as alternatives to full priority.