Chapter 7 Bankruptcy for Businesses

When a business is near failing or so far in debt that it cannot continue to operate, its owners may need to file a Chapter 7 bankruptcy claim. This is also known as “liquidation.” The bankruptcy court appoints a trustee who then sells the company’s assets for cash and distributes the proceeds to creditors.

The Chapter 7 Process

Along with appointing a trustee, the court creates a “bankruptcy estate.” This gives the court and trustee the power to examine and handle the company's financial affairs. In some cases, the bankruptcy court may authorize the trustee to operate the business for a limited period of time, if such operation will benefit creditors and enhance the liquidation of the estate. Generally, a Chapter 7 trustee is responsible for selling all the assets and distributing the proceeds to the creditors after administrative and legal expenses are paid.

Chapter 7 and What Happens to Employees

A Chapter 7 bankruptcy filing may or may not mean that all employees will lose their jobs. When a very large company enters Chapter 7 bankruptcy, entire divisions of the company may be sold intact to other companies during the liquidation. If employees need to be terminated, they will receive some type of wages during the bankruptcy process. The Bankruptcy Code has a list of payment priorities that the trustee must follow. Near the top of that priority list are claims for wages, salaries, and commissions.

Creditor Claims in Chapter 7 Bankruptcies

Generally all creditor’s claims will either be secured or unsecured claims. A secured claim is a claim made by a creditor that is secured by a lien on some property of the business. An unsecured creditor claim is one that is not secured by a lien. Secured creditors will have their collateral returned to them. 

If the company doesn't have enough money to repay them in full, they will be grouped with other unsecured creditors for the rest of their claim. Bondholders and other unsecured creditors will be notified of the Chapter 7 bankruptcy. They should file a claim in case there's money left for them to receive a payment. Unsecured creditors are usually the last to be paid under the priority list set forth in the Bankruptcy Code.

Chapter 7 Bankruptcy and Stockholders

Stockholders do not have to be notified of a Chapter 7 case because they generally don't receive anything in return for their investment. However, in the unlikely event that creditors are paid in full, stockholders will be notified and given an opportunity to file claims for anything that's left over.