Bankruptcy liquidation involves the sale of a company's assets in order to pay off its creditors. There are four classes of creditors in bankruptcy liquidation:
- Fully secured creditors, who are entitled to satisfaction from assets pledged as collateral;
- Partially secured creditors;
- Unsecured creditors with priority, whose claims are satisfied from proceeds of the sale of the debtor's noncollateralized assets; and
- Unsecured creditors without priority, who receive cash from the sale of the debtor's assets.
- Debtor's Petition (Voluntary Petition)
According to bankruptcy code, any person may file a petition for voluntary liquidation in court. The petition must be accompanied by supporting exhibits of the debtor's debts and property, which are classified into three categories: creditors with priority, creditors holding security, and creditors with unsecured claims without priority.
The debtor's property is also divided into three categories: real property, personal property, and property claimed as exempt.
Valuations of property are based on market or fair value, and a statement of financial affairs must also be included with the petition.
- Creditor's Petition (Involuntary Petition)
If the debtor owes unpaid amounts to at least 12 unsecured creditors who are not related to the debtor, three or more of these creditors may file a creditors' petition for bankruptcy in federal court if they have unsecured claims totaling $10,000 or more. If the debtor owes less than 10 unsecured creditors, one or more creditors with unsecured claims of $10,000 or more may file a petition. The creditors' petition may claim that the debtor is not paying debts as they come due or has not paid debts within 120 days prior to the date of the petition.
- Unsecured Creditors with Priority
If there is not enough cash available for all unsecured creditors, the available cash must be paid in full to unsecured creditors with priority. These debts include administrative costs, claims arising in the course of the debtor's business or financial affairs after the commencement of a creditors' bankruptcy proceeding, wages and commissions earned within 90 days of the petition or cessation of the debtor's business, contributions to employee benefit plans within 180 days of the petition or cessation of the debtor's business, claims by grain producers against a grain storage facility or by fishermen against a fish storage or processing facility, claims for goods or services for personal use, claims for alimony, maintenance, or support, and claims by government entities for taxes or duties.
- Property Claimed as Exempt
Certain property of a bankruptcy petitioner is not included in the debtor's estate and is therefore exempt from liquidation. These include residential property, personal property, and retirement accounts. Bankruptcy code sets limits on the value of exempt property, and state law may also provide exemptions.
- Unsecured Creditors Without Priority
Unsecured creditors without priority are paid from the remaining assets of the debtor after the claims of unsecured creditors with priority have been satisfied. This may include general unsecured creditors, such as credit card debts and medical bills. If there are not enough assets to pay all of the unsecured creditors without priority, these creditors may receive a portion of their claims or none at all.
- Bankruptcy Court Approval
The bankruptcy court must approve all aspects of bankruptcy liquidation, including the sale of assets and distribution of proceeds to creditors. The court may also appoint a trustee to oversee the liquidation process.
- Automatic Stay
An automatic stay goes into effect when a debtor files a bankruptcy petition or when a creditor files an involuntary petition. The stay prohibits creditors from taking any action to collect a debt from the debtor or the debtor's property. The stay remains in effect until the bankruptcy case is closed, dismissed, or a discharge is granted.
- Appointment of Trustee
In a bankruptcy liquidation case, a trustee is appointed to oversee the sale of the debtor's assets and distribute the proceeds to the creditors. The trustee is responsible for collecting and selling the debtor's non-exempt assets, reviewing the debtor's petition and schedules, and objecting to any exemptions claimed by the debtor.
- Discharge of Debts
A bankruptcy discharge releases the debtor from personal liability for certain types of debts. The discharge does not eliminate the lien on any property securing a debt, and it does not prevent the trustee from continuing to collect and sell the debtor's non-exempt assets.