Many entities that enter the Court system with the intent of reorganization do not exit the process as a reorganized entity. Entities may, by their own choice, under pressure from creditors, or due to the lack of post-emergence financing, use the Chapter 11 process as a vehicle to liquidate the business. The critical difference between liquidation under Chapter 11 and Chapter 7 (the portion of the Bankruptcy Code that governs liquidations) is that under Chapter 11 the entity's management can often continue to manage the business as well as the liquidation process, albeit supervised by the Court. The Court will determine under which chapter the liquidation will take place by considering whether the legal requirements of a Chapter 11 case can be met. One criterion that would be considered is whether the entity has sufficient funds to pay its administrative claims (also referred to as administrative expenses)—these must be satisfied in order for confirmation to take place. If the legal requirements cannot be met, the Court may convert the case to a Chapter 7 liquidation and the operation of the enterprise will be transferred to an independent trustee. The Chapter 7 process is covered in BLG 1.9.

Liquidations of enterprises that enter Chapter 11 may be attributed to several factors. First, changes in the Bankruptcy Code have moved certain claims to a higher priority. Inventory delivered to a debtor in the 20 days prior to the filing for bankruptcy (known as a "503(b)(9) claim"), for example, was given administrative claim status under a change in the Bankruptcy Code in 2005. Administrative claims must be paid in full prior to confirmation of a reorganization plan. This is often a challenge for cash-strapped enterprises, which can make liquidation more likely. Second, some enterprises may have difficulty obtaining debtor-in-possession financing or, in those cases where it can be obtained, an entity cannot obtain such financing on terms that are considered economically feasible to the ongoing entity. Finally, in many cases, creditors are not willing to wait for a long reorganization process—one that will likely consume significant financial resources of the entity—when they can force liquidation of the entity and receive payment sooner and potentially in a greater amount.

In addition to the liquidation options under the Bankruptcy Code, a sale of some or all of the entity's assets may be the best course of action for the benefit of the creditors. In such a sale, which could be as part of the reorganization plan or through an asset sale known as a Section 363 sale, the Court would approve the sale of all or part of the estate and the funds would be used to satisfy creditors. Often a Section 363 sale, the process for which is described in BLG 5.2.1, will leave behind liabilities and, in certain instances, assets that are not included in the sale which will be liquidated for the benefit of creditors.