Where does money from a sale of a bankrupt company go?


If I buy a product from a company that has closed where (or for who) does this money of the sale go?

In: Economics

When the company went bust, all their assets were sold off to pay debts.

Some holding company bought the rights to that product for pocket change, and they’ll get any *future* profits from it.

Old stock that’s on retail shelves when the company folds has already been purchased by the retailer, so they keep the money.

The debtors. When a company goes bankrupt, a bankruptcy manager is appointed to resolve as much of the legal obligations of the company as possible. That includes selling all remaining stock and assets to keep paying workers for the duration that they keep working till they are laid off and to pay back the debts the company has accumulated.

Usually not all debt can be paid back, so it is the bankruptcy managers duty to pay out according to the age and severity of the claim. A lot of laws need to be taken into account, a lot of negotiating needs to be done etc until the closure is final.

So if you buy the product from a bankrupt company it goes to those final financial obligations the company must fulfill, unless of course another company already bought that stock and the licensing rights to sell that for their own profit, that happens, too.

It depends. When a company files for bankruptcy, it is either to say “let’s re-negotiate this debt, here’s my plan to get the company back on track, and we can start fresh” (Chapter 11). or “There’s no way I can reasonably pay back all of this debt so let’s work something out, where I pay you whatever I got and can get from this business.” (Chapter 7).

The former (Chapter 11) means that the company gets the money, which they can use to pay down their debt or use it for something else (although the debt owners would probably only agree to the restructuring plan if the company was forced to meet certain payments at certain times. If they don’t agree with your plan, they can force a Chapter 7. This negotiation takes place in what’s called a Bankruptcy Court).

For the latter (Chapter 7), any amount of money that can be squeezed from the business (either by sales of products or selling assets like warehouses) goes straight to the debt owners. Think of when you lose at Monopoly. Everything owned by the business has to be sold (or in other words, liquidated) to put as much of a dent as possible in the debt you can never re-pay anyway.

How did you buy something from them if they already closed?

But any incoming cash received by a bankrupt business gets distributed to their creditors (the people and businesses they owe money to), distributed according to the bankruptcy rulings of the courts and administered by their lawyers/bankruptcy administrators.

Unfortunately I’ve had to help a company navigate through a bankruptcy proceeding. The big thing to consider is if they are filing a Chapter 7 (total shutdown) or Chapter 11 (restructuring debt).

You have to file A LOT of paperwork with the courts explaining all assets and liabilities of the company itself and it’s owners (depending on structure of the entity). Afterward, you keep submitting monthly operating reports showing your income as you try to settle the debts.

A bankruptcy lawyer will send out notices to all creditors, and then the creditor has to submit a claim to the court proving they are owed the debt. Then a payment plan (liquidating assets, staying open, etc.) is negotiated in court, and then the creditors get to vote on the plan. If approved, a company can stay open and continue operating with restructured debt they payout over seven years usually. If not, the creditors can force a Chapter 7 bankruptcy, forcing the sale of all assets and the court then decides who gets how much money.

It’s a pretty complex process, and ironically an EXPENSIVE one at that.

Believe it goes to the golden parachute of the CEO who ran the company into the ground to make them look good for a few quarters.

When J.Crew files for bankruptcy, there is something formed called the “estate.” The management team, with the help of advisors, manage the estates until it can determine an exit to the bankruptcy (sale, liquidation, reorg). It’s a concept known as “Debtor-in-Possession,” and some people have problems with it for perhaps obvious reasons.

So let’s say you go into a J.Crew store while in bankruptcy. That cash you paid for the item becomes property of the estate. The company will have gotten approval from the court to pay “ordinary course” business expenses, such as payroll and inventory, so some of it will go there. Once those are paid, it’ll go to “restructuring expenses,” such as law firms and financial advisors and certain expenses which are given top priority status. Whatever cash is left after that will go to people the company owed money to prior to filing, in order of their seniority. So a secured lender will get first, then a “junior” lender, “unsecured” creditors etc. Remember that ownership of the company itself is also in play, so it’s not just this cash amount that everyone fights over.