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Simple English definitions for legal terms
twelve-month liquidation
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A quick definition of twelve-month liquidation:
Twelve-month liquidation is a process where a company sells its assets to pay off its debts within a year. This process is done to settle debts and convert assets into cash. The company cannot recognize any gains or losses on property sold within that time frame. The inventory may not be included unless a bulk sale occurs. This process is also used in bankruptcy cases where a debtor's nonexempt property is collected, converted to cash, and distributed to creditors. The debtor hopes to obtain a discharge, which releases them from any further personal liability for pre-bankruptcy debts.
A more thorough explanation:
Definition: Twelve-month liquidation refers to the process of converting a company's assets into cash within 12 months to settle debts. This process can occur through a special election, partial liquidation, or bankruptcy.
Examples:
- One-month liquidation: This is a special election available to certain shareholders that determines how distributions received in liquidation will be treated for federal income-tax purposes. To qualify for the election, the corporation must be completely liquidated within one month.
- Partial liquidation: This type of liquidation does not completely dispose of a company's assets. Instead, some corporate assets are distributed to shareholders on a pro rata basis, and the corporation continues to operate in a restricted form.
- Bankruptcy: Under Chapter 7 of the Bankruptcy Code, a debtor's nonexempt property is collected, converted to cash, and distributed to creditors. The debtor hopes to obtain a discharge, which releases them from any further personal liability for prebankruptcy debts.
These examples illustrate the different ways in which a company can undergo a twelve-month liquidation. Whether through a special election, partial liquidation, or bankruptcy, the goal is to convert assets into cash to settle debts within a 12-month timeframe.