how liquidation works
chapter 7 of the u s bankruptcy code governs liquidation proceedings solvent companies may also file for chapter 7 but this is uncommon not all bankruptcies involve liquidation chapter 11 for example involves rehabilitating the bankrupt company and restructuring its debts in chapter 11 bankruptcy the company will continue to exist after any obsolete inventory is liquidated after underperforming branches close and after relevant debts are restructured 12unlike when individuals file for chapter 7 bankruptcy business debts still exist after chapter 11 bankruptcy the debt will remain until the statute of limitations has expired and as there is no longer a debtor to pay what is owed the debt must be written off by the creditor 2distribution of assets during liquidationassets are distributed based on the priority of various parties claims with a trustee appointed by the u s department of justice overseeing the process the most senior claims belong to secured creditors who have collateral on loans to the business these lenders will seize the collateral and sell it often at a significant discount due to the short time frames involved if that does not cover the debt they will recoup the balance from the company s remaining liquid assets if any 3next in line are unsecured creditors these include bondholders the government if it is owed taxes and employees if they are owed unpaid wages or other obligations 3finally shareholders receive any remaining assets in the unlikely event that there are any in such cases investors in preferred stock have priority over holders of common stock liquidation can also refer to the process of selling off inventory usually at steep discounts it is not necessary to file for bankruptcy to liquidate inventory 34liquidation of securitiesliquidation can also refer to the act of exiting a securities position in the simplest terms this means selling the position for cash another approach is to take an equal but opposite position in the same security for example by shorting the same number of shares that make up a long position in a stock a broker may forcibly liquidate a trader s positions if the trader s portfolio has fallen below the margin requirement or they have demonstrated a reckless approach to risk taking example of liquidationcompany abc has been in business for 10 years and has been generating profits throughout its run in the last year however the business has struggled financially due to a downturn in the economy it has reached a point where abc can no longer pay any of its debts or cover any of its expenses such as payments to its suppliers abc has decided that it will close up shop and liquidate its business it enters into chapter 7 bankruptcy and its assets are sold off these include a warehouse trucks and machinery with a total value of 5 million currently abc owes 3 5 million to its creditors and 1 million to its suppliers the sale of its assets during the liquidation process will cover its obligations 