Liquidation – in a Business Bankruptcy Petition

Chapter 7 of the Reform Act, 1978 deals with Liquidation under bankruptcy proceeding. In most cases, small firms file business bankruptcy under Chapter 7 because it is very unlikely that rehabilitation attempts for small firms under chapter 11 will be successful and if rehabilitation attempts are unsuccessful under Chapter 11, the business bankruptcy proceedings will automatically be done under chapter 7. Organizations, whose liquidation value is likely to be more than the fair value of net assets, should be ideal candidate for liquidation.

Chapter 7 liquidation is carried out in a voluntary or involuntary petition in federal bankruptcy court. Three or more creditors with unsecured claims totaling $ 12,300 or more are required to initiate involuntary business bankruptcy subject to establishing evidence that the debtor is equitable, i.e., the debtor had failed to pay dues in time.

The court gives a stay order that prevents any further creditor collection action. The court appoints an interim trustee who takes control of debtor’s property.

In first creditor’ meeting, a permanent trustee may replace the trustee appointed by the court. The trustee administers the estate, sells the assets and distributes the proceeds to the creditors as per some priorities. Secured creditors get the preference first. A claim with a higher priority is fully paid before any lower priority claim is paid.