Chapter 7

Chapter 7

A bankruptcy proceeding where a company stops all operations and goes completely out of business. A trustee is appointed to liquidate (sell) the company's assets, and the money is used to pay off debt.

Notes:

The investors who take the least risk are paid first. For example, secured creditors take less risk because the credit that they extend is usually backed by collateral, such as a mortgage or other asset of the company. Next in line are the unsecured creditors, and then the investors. We call this phenomenon "absolute priority."

See also: Absolute Priority, Bankruptcy, Chapter 11, Discharge in Bankruptcy, Prepackaged Bankruptcy

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Chapter 7

A bankruptcy option in which a bankrupt firm is liquidated after the courts have determined that reorganization is not worthwhile. A trustee is charged with liquidating all assets and distributing the proceeds to satisfy claims in their order of priority. In Chapter 7 bankruptcies the creditors often receive a fraction of the value of their claims and the stockholders receive nothing.