Understanding Post-Bankruptcy Liquidation Trusts

A main goal in bankruptcy is to get in and out as quickly as possible to minimize costs. It is often the case that even though a substantial portion of a debtor's assets have been liquidated in bankruptcy, some valuable assets will remain that can provide additional sources of recovery to creditors. These assets may include smaller pieces of real estate, accounts receivable, joint venture ownership interests, and claims and causes of action, among others.

In a chapter 11 case, the debtor exits bankruptcy by confirming a plan and having the plan go effective. When a debtor has assets remaining but is otherwise ready to exit the bankruptcy case – for example, because it has closed a sale of a substantial portion of its assets – the plan typically provides for the formation of a liquidation trust on the plan effective date. All remaining assets are transferred to the trust for liquidation, and any proceeds are distributed to creditors, i.e., the trust beneficiaries,