Liquidating business assets
Most companies do not file Chapter 7 until they've been unsuccessful with a Chapter 11 filing, which lets them attempt to restructure the company and restore the ability to service debt.In Chapter 7, a company ceases operations, and the appointed trustee liquidates the company's assets in order to repay its debts.If all the debtor's assets are tax-exempt or subject to liens, there may not be any assets to liquidate and hence no money to distribute to creditors.If there are assets to liquidate, however, the creditors usually file a written claim so they can receive some of the proceeds.However, the steps preceding liquidation usually involve bankruptcy, which -- at the individual level -- virtually ruins a person's credit for several years, making it very difficult and expensive to borrow money in the future.For businesses, liquidation usually means closing for good and selling off all the assets. 331, a liquidating distribution is considered to be full payment in exchange for the shareholder’s stock, rather than a dividend distribution, to the extent of the corporation’s earnings and profits (E&P).The shareholders generally recognize gain (or loss) in an amount equal to the difference between the fair market value (FMV) of the assets received (whether they are cash, other property, or both) and the adjusted basis of the stock surrendered.
Although this sounds harmless, in the corporate world the term often carries a connotation of failure, because it is most often used in discussions about Chapter 7 -- a section of U. bankruptcy law under which companies and individuals liquidate their assets in order to repay their debts.
Lenders whose debt is backed by collateral are generally repaid first (via the receipt of the collateral), followed by the unsecured lenders and then the shareholders.
In many cases, unsecured bondholders receive only pennies on the dollar. Why It Matters Liquidation is usually the last step in the effort to repay debt.
Businesses The procedure for filing Chapter 7 bankruptcy is very similar for businesses.
Public companies must also file a form 8-K with the SEC to notify shareholders of the bankruptcy proceedings.