What is it?
Chapter 7 is the liquidation of a debtor’s estate and distribution of cash proceeds to creditors according to a pre-arranged scheme or set of priorities. To accomplish this goal the Court must appoint an independent 3rd party (the Trustee) to take control of the debtor’s possessions and move in the direction of their sale. This third party is usually an Attorney but can also be an Accountant. Although the United States Trustee makes the initial appointment of the Chapter 7 Trustee, the creditors may insist on an election at which they can install anyone of their choosing, so long as he or she is “disinterested” (more on this later).
Who Can be a Debtor?
Chapter 7 is available to any person or entity except railroads (and as otherwise noted above). Cases which start under other Chapters can be converted to Chapter 7 at almost any time. Typically, this happens when the Debtor’s business cannot be salvaged, and continued operation will only result in increased losses.
How are Assets Disposed of?
While the Court may authorize the Trustee to operate the Debtor’s business for a short time if doing so would increase the creditors’ recovery on the Debtor’s assets, Chapter 7 frequently involves selling the Debtor’s assets on a piecemeal basis, rather than as a going concern. For example, trustees routinely operate a business to complete work-in-progress if there is a reasonable likelihood that the resulting inventory can be sold (rather than selling the work-in-progress for scrap value). Sales are conducted via public auction or a negotiated private sale.
What Factors go Into a Successful Asset Sale?
The degree to which such the sale of a debtor’s assets succeeds depends on factors such as a Trustee’s contacts among likely buyers, the advertising budget, and the Trustee’s willingness to engage in aggressive marketing. The more successful a sale, the more creditors receive and the higher the Trustee’s commission –- note however that the debtor sees no difference regardless of the price at which assets are sold. The benefit to the debtor is merely release from debt – or so the theory goes.