Question

Consider a firm which has a value of $7 million and is liquidated in Chapter 7. There are two outstanding claims. Creditor A has a claim for $5 million senior debt which is secured by a building valued at $3m. Creditor B has a senior debt claim of $6 million.

1.) Which claim is paid out first?

2.) How much creditor A gets in liquidation?

3.) How much creditor B gets in liquidation?

4.) What percentage of creditor A’s claim is paid?

5.) What percentage of creditor B’s claim is paid?

Answer 1

a)The $3 m worth of secured senior debt is paid out first.

b) Remaining amount with the company= $7m - $3m = $4 m

Remaining claim of A= $5m-$3m = $2 m

Remaining claim of B= $6 m

Hence amount that creditor A will get out of $4 m = 4*2/8 = $1 m

Total amount that creditor A gets= $3m secured + $1 m = $4 m

c) Total amount that creditor B gets= 4m*6/8 = $3m

d) Creditor A's claim is paid to the extent of 4/5 = 80%

e) Creditor B's claim is paid to the extent of 3/6 = 50%