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How do retailers liquidate assets under Chapter 7 bankruptcy?

As retailers such as Toys R Us close their doors around the United States, many people have questions about how the closing sales will function. Much of how these sales will play out in Connecticut and throughout the country is determined by bankruptcy liquidation, also known as Chapter 7 bankruptcy. This may be the fate of Toys R Us as the retailer filed for Chapter 11 bankruptcy protection in September in hopes of restructuring their operations and cutting debt.

If and when Toys R Us converts its Chapter 11 to Chapter 7 bankruptcy, it will be able to sell off all assets and close the remaining stores. In this type of bankruptcy, a trustee is appointed to liquidate the company's assets. This is the process which triggers closing sales, with the money raised from these sales being used to pay off people in a predetermined order.

Administrative and legal expenses are the first paid under Chapter 7 bankruptcy, followed by secured creditors. Unsecured creditors, including vendors, are the last to be paid. As a result, it is common for these groups to not receive what they are owed.

As a result of the clear laws and standards around Chapter 7 bankruptcy, the sales that will take place throughout Connecticut and the United States will be largely dictated by the court-appointed trustee. Repayment will also be subject to these specifications. Retailers who face financial challenges and bankruptcy should be aware of all the laws governing these steps. A lawyer who focuses on business law and Chapter 7 bankruptcy is an important person to work with should this happen.

Source: USA Today, "How Chapter 7 liquidation works: Toys R Us prepares to go out of business", Joan Verdon and Nathan Bomey, March 9, 2018

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