Chapter 7 Bankruptcy
Category: legal
A liquidation bankruptcy where a court-appointed trustee sells the debtor’s non-exempt assets to pay creditors.
Chapter 7 is the "liquidation" code. The business ceases all operations immediately. A trustee is appointed to sell off all inventory, equipment, and real estate, distributing the cash to creditors according to the absolute priority rule. For businesses, Chapter 7 does not result in a "discharge" of debts—the entity simply ceases to exist.
Common Examples
- After failing to secure emergency funding, the startup converted its Chapter 11 case into a Chapter 7 liquidation.
- In a Chapter 7 personal bankruptcy, the individual’s exempt property is protected, while all other assets are liquidated to satisfy creditors.