Bankruptcy Judge Powers: The Chapter 11 Waterfall

The bankruptcy judge has become an unexpectedly important figure in the private credit debate, because the market’s biggest test case is now playing out in a courtroom. When First Brands Group filed Chapter 11 in September 2025 with over $11 billion in liabilities, the questions that followed (whose collateral was it, who gets paid first, and who was lending against assets that did not exist) all became matters for a bankruptcy judge to sort out. Dr. Martin Weiss’s “America’s Next Subprime Crisis” presentation opens with exactly this scenario, a company collapsing “under a mountain of debt” with money that “everyone thought there to back it up is not there after all.” We break down that angle in our “First Brands Group Bankruptcy: The $11 Billion Warning” piece.

If you are following that case, or any private credit casualty, here is what a bankruptcy judge actually controls.

The Automatic Stay

The first and most powerful tool: the moment a Chapter 11 petition is filed, the automatic stay freezes nearly all creditor collection activity. Lawsuits pause. Repossessions stop. Lenders cannot seize collateral while the case proceeds. The company keeps operating as “debtor in possession,” meaning existing management runs the business under court supervision. The stay is what converts a debt crisis into a legal process, and it is why the First Brands filing did not trigger an immediate scramble of lenders grabbing assets.

DIP Financing

A company in Chapter 11 needs cash to keep operating. The judge approves debtor-in-possession financing, new loans that rank ahead of much existing debt. The DIP lender gets super-priority, which is why existing creditors often fight these arrangements: the new money dilutes their recovery position. In big private credit cases, the same funds holding the old loans sometimes provide the DIP, which raises conflicts the judge must police.

Collateral and Lien Disputes

This is where the First Brands case gets interesting for anyone watching private credit. When the filing disclosed that some collateral was missing, the question became a lien-priority fight: which lender has a valid, first-priority claim on which assets. Judges oversee litigation over lien validity, double pledges (the Tricolor Holdings collapse involved auto-loan collateral pledged twice, and the SEC has since charged its former executives with fraud over the $1.9 billion failure), and fraudulent-transfer claims that try to claw back assets moved out of creditors’ reach before the filing.

The Plan and the Waterfall

The endgame of Chapter 11 is a plan of reorganization, which the judge must confirm. The plan orders the recovery waterfall: secured creditors first, up to the value of their collateral; then statutory priority claims (wages, taxes, some administrative costs); then unsecured creditors; then subordinated debt; then equity holders, who are usually wiped out or diluted in exchange for the company surviving. When collateral is missing, a nominally “secured” lender slides down the waterfall toward unsecured treatment, which is the private credit nightmare scenario: you lent at secured-loan rates and you recover at unsecured-loan speed.

The Judge’s Limits

It is worth knowing what the judge cannot do. A bankruptcy court cannot rescue a business model that no longer works; it can only supervise the division of what remains and give a viable company room to reorganize. It cannot make missing collateral reappear, which is why the lien litigation in a case like First Brands matters so much: the recovery percentages are set by what the documentation and the record can prove, not by what the lenders assumed. And it cannot pay unsecured creditors money the estate does not have. The waterfall is honest arithmetic, and the judge is its referee.

Why This Matters to the Weiss Pitch

The presentation’s argument is that the private credit market’s paper is graded, packaged, and distributed with less visibility than mortgage securities had in 2006, and that when the defaults come, the discovery process (collateral missing, priorities contested) will happen in bankruptcy court, after ordinary holders have already taken the exposure through funds and annuity-adjacent products. The First Brands case is the live demonstration: a filing over $11 billion where the collateral questions surfaced only after the stay was in place and the judge took over. We walk through the full story in our “First Brands Filing: What Wall Street Found Inside” article.

The pitch’s own summary of the era is the framing we quoted: “Not subprime mortgages, but subprime private credit,” spreading “like cancer within America’s financial system.” The four exhibits behind it (First Brands, Tricolor, the 5% withdrawal cap at BlackRock’s HPS fund, the redemption cap backlogs at Blackstone’s BCRED) are all documented. The systemic conclusion is Weiss’s forecast, hedged in his own words.

For the parallel hidden-risk argument, see our coverage of subprime AI debt inside the AI bubble warnings; for the protective playbook these pitches converge on, portfolio protection strategies for a shaky market.

The presentation leads to a $49 trial year of the Safe Money Report with the X-Lists of at-risk banks, insurers, and S&P 500 stocks, with a 12-month refund window. You can review it here.

The bankruptcy judge is where a credit crisis stops being a headline and becomes a set of dockets, deadlines, and recovery percentages. The First Brands courtroom is currently the best classroom for watching how the private credit era resolves its first big failure.

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