April 06, 2021 Practice Points

The Basics of Chapter 11 Liquidating Trusts

A beginner’s guide to a bankruptcy mechanism that has become increasingly relevant due to the COVID-19 pandemic.

By Fred Pape

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An unfortunate byproduct of the COVID-19 pandemic over the last year has been an increase in commercial Chapter 11 bankruptcy filings. At the end of 2020, data provided by Epiq’s AACER bankruptcy information services show that filings rose by 29 percent when compared to 2019. The surge in filings will likely result in the increased use of liquidating trusts. So, what exactly are liquidating trusts? The following is a brief overview of some of the basics.


Section 1123 of the U.S. Bankruptcy Code provides for the establishment of a liquidating trust to assist in the wind-down or reorganization of the debtor. The main functions can include:

  • placing and managing assets in a trust
  • liquidating trust assets
  • pursuing potential recoveries related to litigation
  • analyzing and reconciling claims
  • preparing and making distributions to holders of allowed claims
  • dissolving the debtor entities

Governing Documents

To realize the functions above, liquidating trusts are governed by what is known as a plan of liquidation. The plan of liquidation typically includes the rules of interpretation, classification, and treatment of claims; means for implementation; procedures for resolving claims; provisions governing distributions; and other miscellaneous provisions. The plan of liquidation may reference the disclosure statement. The disclosure statement contains historical information related to the debtor including assets, liabilities, and financial performance. The plan of liquidation is usually accompanied by a liquidating trust agreement, which establishes the liquidating trust and details the role of the liquidating trustee.

Parties Involved

Some of the main parties involved in the implementation of the plan of liquidation are:

  • liquidating trustee:  person or entity charged with carrying out the Plan of Liquidation while representing the estate of the debtors
  • counsel: lead counsel for the liquidating trust, who may also serve as liquidating trustee, and local counsel, who normally focuses on matters specific to the jurisdiction
  • consultants: may include professionals who specialize in project management, subject-matter experts, and financial and tax advisors
  • former employees: those who possess specific knowledge of the debtor’s history and processes

Key Dates

There are several keys dates associated with the liquidating-trust process. The petition date is the date when the Chapter 11 bankruptcy petition is filed with the court. This is the beginning of the bankruptcy case for the debtor and establishes the pre-petition and post-petition periods. The confirmation date is when the court holds a hearing for confirmation of the plan of liquidation. If the plan of liquidation is confirmed, it gets set in motion on the effective date. The first-day motions, which are filed on the first day (or first couple of days) that the plan of liquidation is effective provide for payment of certain obligations. These motions may include a cash-collateral motion, taxes motion, critical-vendors motion, and insurance motion, among others.

The claims bar dates are set as deadlines by which creditors can assert claims against the debtor. The claims bar dates generally include specified dates for a general bar date, a governmental bar date, and an administrative bar date. Claims of the specific type filed after the applicate bar date may be deemed late-filed, and disallowed.


Claims are paid from the trust assets according to a waterfall designated in the plan of liquidation. Creditors with claims in the same classification receive equal treatment as provided in the plan of liquidation. Common claims types include:

  • secured:  pre-petition claims that are secured by collateral, commonly in the form of a lien on property
  • administrative: post-petition claims for expenses related to preserving the estate
  • administrative 503(b)(9): claims for goods received by the debtor within 20 days of the bankruptcy filing
  • priority:  pre-petition unsecured claims entitled to priority treatment often include employee wage and benefit claims and various types of tax claims
  • general unsecured:  pre-petition claims not afforded priority and typically receive a remaining pro rata share of beneficial interests in the trust assets after the other claims types above have been paid

While the content above provides select snippets of information, it is not comprehensive. A significant amount of planning and work goes into the process of establishing and effectuating a liquidating trust.

Fred Pape is a director at Ankura Consulting Group, LLC in Philadelphia, Pennsylvania.

Ankura is the Litigation Advisory Services Sponsor of the ABA Litigation Section. This article should be not construed as an endorsement by the ABA or ABA Entities.


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