Chapter 7 of the U.S. Bankruptcy Code contains regulations regarding liquidation under the bankruptcy law. A bankruptcy according to this chapter will, therefore, end in complete liquidation. This can be compared to a Chapter 11 bankruptcy, where reorganization takes place instead of liquidation. Bankruptcy under Chapter 7 is much more common than Chapter 11 bankruptcy. In 2003, there were more than 1 million individual filings for bankruptcy under Chapter 7 bankruptcy law, but less than one thousand individual filings for Chapter 11 bankruptcy. On the business side, there were more than 20,000 filings under Chapter 7 bankruptcy law and less than 10,000 filings for Chapter 11 bankruptcy. Filing Chapter 7 bankruptcy is usually done when other ways to rescue the financial situation has proven powerless.
Filing Chapter 7 bankruptcy can be done by a company under Chapter 7 bankruptcy law in a federal court by its own initiative. A company can also be forced into filing Chapter 7 bankruptcy under Chapter 7 bankruptcy law by its creditors. When filing for bankruptcy under Chapter 7 bankruptcy law, the company request for a liquidation to take place. Filing chapter 7 bankruptcy will result in all the assets being converted into money and used to pay off debts to creditors. The company will end all its operations and virtually seas to exist. The company will however never be allowed a discharge of its depths even after filing chapter 7 bankruptcy. In theory, the debts of the company will continue to exist even after a bankruptcy under Chapter 7 bankruptcy law, but since there is no money coming in to an inactive company, the creditors will rarely receive more money than what they got during the liquidation process in accordance with chapter 7 bankruptcy law.
Liquidation under chapter 7 bankruptcy law will typically take place when all other techniques for corporate recovery are out of reach. Since an established company is usually worth more than its hard assets, some type of corporate recovery is usually a more desired solution than filing Chapter 7 bankruptcy. A bankruptcy under Chapter 7 bankruptcy law will usually mean that the employees are laid off, but sometimes entire divisions of a company are bought during the liquidation process and the employees can resume their ordinary tasks or be given new jobs in the purchasing entity.
The core idea of a liquidation is that the creditors should be paid off pari passu, which means that all the creditors should receive the same percentage of their claims if there is not enough money to pay off all the debts in full. Today, this basic rule is however greatly modified, and some types of debts are paid before other during a bankruptcy under Chapter 7 bankruptcy law. After filing chapter 7 bankruptcy, the creditors are divided into a number of classes: debenture charge holders, preferential creditors, floating charge holder and unsecured creditors. Holders of secured bonds will always have a better position according to the chapter 7 bankruptcy law. A debenture is a depth that is secured by all properties that are not otherwise pledged, and a debenture charge holder is a general creditor according to Chapter 7 bankruptcy law. There is also something called “subordinated debenture”. A subordinated debenture is subordinated to certainly designated debts, such as bank loans. During a liquidation under Chapter 7 bankruptcy law, a subordinated debenture holder will not receive any money until the senior debt has been fully paid.
As mentioned earlier, filing chapter 7 bankruptcy is possible for an individual too. Unlike a company, an individual that is filing for bankruptcy under Chapter 7 bankruptcy law is allowed to maintain the certain exempt property. Several types of liens, e.g. real estate mortgage, will also stay with the individual even after filing chapter 7 bankruptcy.