Equitable Subordination versus Debt Recharacterization

Summary

This practice note discusses the tests for and the differences between equitable subordination and debt recharacterization. The Bankruptcy Code specifically authorizes equitable subordination in Section 510(c) but is silent with respect to debt recharacterization. 11 U.S.C. § 510(c). Courts nevertheless recognize their authority to recharacterize debt as equity through reference to Section 105(a) or 502(b) of the Bankruptcy Code.