What happens to a company's assets during bankruptcy?

During bankruptcy, a company's assets are subjected to a legal process that prioritizes claims from creditors according to a defined hierarchy. In this process, prior claims are evaluated to determine the order in which creditors will be paid. This means that secured creditors, who have a legal claim over specific assets, will typically be paid first, followed by unsecured creditors based on their claims against the company.

The evaluation of claims is critical because it establishes a fair distribution of the company’s remaining assets, which are often limited. This ensures that all parties with a stake in the company’s financial obligations have their claims assessed and addressed appropriately.

The other choices do not accurately depict the standard procedure in bankruptcy. For instance, while assets may indeed lose some liquidity during the proceedings, the characterization of becoming “illiquid” is not a defining feature of bankruptcy. Additionally, while assets may be lost to creditors in the process, this does not equate to permanent loss in every scenario, as some assets can be retained or reorganized. Lastly, assets may be sold, but this is not guaranteed to happen at market value, particularly in distressed situations where market conditions may adversely affect the selling price.