CLFP Equipment Finance Certification Practice Exam

In a liquidating bankruptcy, what happens to assets?

Assets stay with the debtor. Assets are transferred to a trustee who distributes them to creditors. Assets are destroyed. Assets are donated to charity.

Correct Answer:

Assets are transferred to a trustee who distributes them to creditors.

Explanation:

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.

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