A bankruptcy auction is an auction of a debtor’s assets in order to generate cash for the bankruptcy estate. That cash will then be distributed to the debtor’s creditors.
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Bankruptcy auctions can take place in conjunction with either a personal bankruptcy filing (Chapter 7) or a business bankruptcy filing (Chapter 11).
Chapter 7 Bankruptcy Auctions: Chapter 7 bankruptcy allows a petitioner to liquidate most debts. Once a Chapter 7 bankruptcy petition has been filed, the court issues an automatic stay, mailing notices to most creditors to cease collection attempts.
The majority of Chapter 7 petitions are “no-asset” cases: petitioners have no money or property in excess of the exemptions under the law.
In those cases where such assets do exist, however, the court assigns the petitioner a Trustee who collects all the petitioner’s property that is not exempt under the law. Eligible property is then auctioned to generate cash. The bankruptcy estate’s creditors are invited by the Trustee to file a proof of claim, and the cash is then distributed among the creditors. The fees owed to the auctioneer, the Trustee and their attorneys are also paid from the cash.
In contrast to Chapter 7 bankruptcy where obligations are met through a public auction of non-exempt assets, Chapter 13 bankruptcy provides petitioners with an opportunity to reorganize their finances. Chapter 13 bankruptcy is essentially an extended repayment plan that allows the petitioner to repay all or part of his or her debt over a three to five year period. Chapter 13 provides a petitioner with the opportunity to keep more assets than he or she would be allowed to under Chapter 7 provisions.
Chapter 11 Bankruptcy Auctions: Chapter 11 bankruptcy provisions were designed to give businesses and corporations the opportunity to reorganize and return to profitability. In some cases a business successfully turns itself around; in other cases, it does not.
Even before a reorganization plan is proposed, the debtor can file a motion with the court to auction assets. Auction proceeds are then used to pay creditors. If the business does not succeed in reorganizing itself successfully, then it will be liquidated and its assets auctioned in order to pay as many of its creditors as possible.
A Chapter 11 bankruptcy auction is administered with a great deal of care to ensure that creditors receive maximum value. Debtors will often hire financial advisors. Bidders will be vetted carefully beforehand to ensure they have the financial means to participate in the auction process, and they may be asked to sign a confidentiality agreement. When a bid is approved, the debtor and the bidder enter into a purchase agreement; however, the actual purchase cannot be made without the approval of the bankruptcy court, and third parties still have an opportunity to come to court on the day the purchase is scheduled to be approved to offer a higher purchase price.
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