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Unformatted text preview: claims, disburse money, furnish information as required, and make final reports on the liquidation. In essence, the
trustee is responsible for the liquidation of the firm. Occasionally, the court will
call subsequent creditor meetings, but only a final meeting for closing the bankruptcy is required. secured creditors
Creditors who have specific
assets pledged as collateral and,
in liquidation of the failed firm,
receive proceeds from the sale of
unsecured, or general, creditors
Creditors who have a general
claim against all the firm’s
assets other than those specifically pledged as collateral. Priority of Claims
It is the trustee’s responsibility to liquidate all the firm’s assets and to distribute
the proceeds to the holders of provable claims. The courts have established certain procedures for determining the provability of claims. The priority of claims,
which is specified in Chapter 7 of the Bankruptcy Reform Act, must be maintained by the trustee when distributing the funds from liquidation. Any secured
creditors have specific assets pledged as collateral and, in liquidation, receive proceeds from the sale of those assets. If these proceeds are inadequate to fully satisfy
their claims, the secured creditors become unsecured, or general, creditors for the
unrecovered amount, because specific collateral no longer exists. These and all CHAPTER 17 TABLE 17.9 Mergers, LBOs, Divestitures, and Business Failure 741 Order of Priority of Claims in Liquidation
of a Failed Firm 1. The expenses of administering the bankruptcy proceedings.
2. Any unpaid interim expenses incurred in the ordinary course of business between filing
the bankruptcy petition and the entry of an Order for Relief in an involuntary proceeding. (This step is not applicable in a voluntary bankruptcy.)
3. Wages of not more than $2,000 per worker that have been earned by workers in the
90-day period immediately preceding the commencement of bankruptcy proceedings.
4. Unpaid employee benefit plan contributions that were to be paid in the 180-day period
preceding the filing of bankruptcy or the termination of business, whichever occurred
first. For any employee, the sum of this claim plus eligible unpaid wages (item 3) cannot
5. Claims of farmers or fishermen in a grain-storage or fish-storage facility, not to exceed
$2,000 for each producer.
6. Unsecured customer deposits, not to exceed $900 each, resulting from purchasing or leasing a good or service from the failed firm.
7. Taxes legally due and owed by the bankrupt firm to the federal government, state government, or any other governmental subdivision.
8. Claims of secured creditors, who receive the proceeds from the sale of collateral held,
regardless of the preceding priorities. If the proceeds from the liquidation of the collateral
are insufficient to satisfy the secured creditors’ claims, the secured creditors become unsecured creditors for the unpaid amount.
9. Claims of unsecured creditors. The claims of unsecured, or general, credito...
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