Bankruptcy and Reorganization (2)

by Maestri

Liquidation occurs if the company is deemed to be too far gone to be saved—if it is worth more dead than alive. If the bankruptcy court orders a liquidation, assets are sold off and the cash obtained is distributed as specified in Chapter 7 of the Bankruptcy Act. Here is the priority of claims:

1. Secured creditors are entitled to the proceeds from the sale of the specific property that was used to support their loans.
2. The trustee’s costs of administering and operating the bankrupt firm are next in line.
3. Expenses incurred after bankruptcy was filed come next.
4. Wages due workers, up to a limit of $2,000 per worker, follow.
5. Claims for unpaid contributions to employee benefit plans are next. This amount, together with wages, cannot exceed $2,000 per worker.
6. Unsecured claims for customer deposits up to $900 per customer are sixth in line.
7. Federal, state, and local taxes due come next.
8. Unfunded pension plan liabilities are next although some limitations exist.
9. General unsecured creditors are ninth on the list.
10. Preferred stockholders come next, up to the par value of their stock.
11. Common stockholders are finally paid, if anything is left, which is rare.

The key points for you to know are (1) the federal bankruptcy statutes govern both reorganization and liquidation, (2) bankruptcies occur frequently, and (3) a priority of the specified claims must be followed when distributing the assets of a liquidated firm.

Taken From : Five-Minute MBA – Corporate Finance

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