Liquidation occurs if the company is deemed to be worth more “dead” than “alive.” If the bankruptcy court orders a liquidation, assets are auctioned off and the cash obtained is distributed as specified in Chapter 7 of the Bankruptcy Act. Web Appendix 7B provides an illustration of how a firm’s assets are distributed after liquidation. For now, you should know that (1) the federal bankruptcy statutes govern reorganization and liquidation, (2) bankruptcies occur frequently, (3) a priority of the specified claims must be followed when the assets of a liquidated firm are distributed, (4) bondholders’ treatment depends on the terms of the bond, and (5) stockholders generally receive little in reorganizations and nothing in liquidations because the assets are usually worth less than the amount of debt outstanding.
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