Chapter 7: Liquidation
Chapter 7 is one of the two primary options available to private companies in distress. Chapter 7 is also referred to as Liquidation. A Chapter 7 proceeding is one in which a business or firm is terminated or stops operating. The business assets are sold, and proceeds of the sale are distributed to creditors.
As does a public company, a private company qualifies for filing a Chapter 7 bankruptcy. The portion of the debt that cannot be repaid through liquidation is absolved. Private companies generally try to avoid Chapter 7 bankruptcy, because it terminates all business operations with no opportunity to reinstate later. Income generated after the bankruptcy filing is considered in the proceedings.
Example: Secured creditors take less risk because the credit that they extend is usually backed by collateral, such as revenue or other assets of the private company. After all debts with secured creditors have been settled, the subordinated levels of debt, such as unsecured creditors, can claim repayment. After all the private company’s debt is settled, equity investors can stake a claim on assets.