The combining of the bankruptcy estates of two or more related debtors into a single estate for the purpose of paying the claims belonging to creditors of both debtors. Substantive consolidation is an equitable doctrine which allows the court to disregard the separate legal status of two or more entities in order to prevent a perceived injustice. Such injustice may lie where creditors dealt with the entities as a single economic unit and did not rely on their separate existence in extending credit, or where the affairs of the debtors are so entwined that consolidation will benefit all creditors. Courts are reluctant to permit substantive consolidation because it results in creditors of the relatively poorer estate sharing with creditors of the richer estate. It must be justifiable both in terms of the benefit conferred on one set of creditors and in terms of the harm suffered by another group of creditors as a result.

For more information, see Practice Note, Substantive Consolidation in Bankruptcy.