Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” involves the systematic liquidation of a business debtor’s assets by a bankruptcy trustee, with the proceeds distributed to creditors. This process signifies the end of the business partner for creditors, although occasionally, the trustee may operate the business briefly to sell assets as a going concern. While Chapter 7 shares similarities with Chapter 11, such as the automatic stay and claim filing deadlines, it presents unique challenges and opportunities for creditors.

One of the primary distinctions in Chapter 7 is the immediate appointment of a bankruptcy trustee, who replaces the debtor’s management and assumes control over the business. The debtor’s role is largely limited to disclosing assets and liabilities, cooperating with the trustee, and undergoing examinations under oath. Additionally, executory contracts and unexpired leases are automatically rejected if not assumed within 60 days post-relief order, prompting non-debtor parties to engage with the trustee promptly.

Creditors must be vigilant in filing proof of claims, as deadlines are only set if the trustee identifies assets for administration. While Chapter 7 can theoretically expedite creditor payments due to the absence of a plan confirmation, proceedings can extend over years, especially if litigation is involved. Given these complexities, creditors should seek guidance from experienced bankruptcy counsel to navigate the nuances of Chapter 7 and safeguard their interests effectively. Read full article here.