In a liquidating bankruptcy, what happens to assets?

In a liquidating bankruptcy, what happens to assets?

• A. Assets stay with the debtor.
• B. Assets are transferred to a trustee who distributes them to creditors.
• C. Assets are destroyed.
• D. Assets are donated to charity.

Answer: (B)

In a liquidating bankruptcy, assets don’t stay with the debtor. Instead, they become part of a bankruptcy estate that a trustee oversees. The trustee gathers the debtor’s non-exempt property and converts it to cash by selling it. The money from those sales is then distributed to creditors following a priority order, with secured creditors paid first, then priority unsecured creditors, and finally general unsecured creditors. The debtor can keep property that’s protected by exemptions, but non-exempt assets are sold to help repay creditors. This is why the idea that assets are transferred to a trustee who distributes them to creditors is correct.

In a liquidating bankruptcy, assets don’t stay with the debtor. Instead, they become part of a bankruptcy estate that a trustee oversees. The trustee gathers the debtor’s non-exempt property and converts it to cash by selling it. The money from those sales is then distributed to creditors following a priority order, with secured creditors paid first, then priority unsecured creditors, and finally general unsecured creditors. The debtor can keep property that’s protected by exemptions, but non-exempt assets are sold to help repay creditors. This is why the idea that assets are transferred to a trustee who distributes them to creditors is correct.