Introduction

In bankruptcy proceedings, liquidation involves selling off a debtor’s assets to repay creditors. This process is governed by the Turkish Execution and Bankruptcy Law (Law No. 2004), which outlines how a debtor’s assets are collected, the formation of the bankruptcy estate, and the priority of creditor claims. This guide explains the key stages of liquidation in bankruptcy and the rights of creditors.

The bankruptcy estate (iflas masası) refers to the pool of assets that is created when a debtor is declared bankrupt. These assets are collected and managed for the purpose of liquidation and debt repayment. The main stages of forming the bankruptcy estate include:

• Asset Collection: All of the debtor’s movable and immovable property, as well as any claims they hold against third parties, are included in the bankruptcy estate. This includes real estate, bank accounts, inventory, and any other valuable assets.
• Third-Party Claims: Creditors or other parties who have claims on the debtor’s assets must come forward during this stage to assert their rights. Assets that are found to be subject to liens or mortgages will be handled separately under the priority rules.
• Freezing of Transactions: Once the estate is formed, the debtor loses control over their assets, and no transactions involving the debtor’s property can take place without approval from the bankruptcy administrator.

Creditors have specific rights in the liquidation process, which are designed to ensure a fair distribution of the debtor’s assets. These rights include:

• Priority in Payment: Creditors are classified based on the nature of their claims. Secured creditors, who hold a mortgage or lien on specific property, are paid first from the sale of that property. Unsecured creditors are paid from the remaining assets after secured debts are satisfied.
• Right to Information: Creditors are entitled to regular updates on the status of the liquidation process. The bankruptcy administrator is required to provide detailed reports on the collection and sale of assets, as well as the distribution of proceeds.
• Right to Object: If creditors believe the bankruptcy administrator is not acting in their best interests, they have the right to object to the decisions made during liquidation. Creditors can also challenge fraudulent transactions made by the debtor before the bankruptcy.

• Once the bankruptcy estate is formed, the liquidation process involves selling the debtor’s assets and distributing the proceeds to creditors. Key steps in this process include:
  • Asset Sale: The bankruptcy administrator is responsible for organizing the sale of the debtor’s assets. Sales are typically conducted through public auctions, but private sales may also be allowed under certain conditions.
  • Proceeds Distribution: After the sale of assets, the proceeds are distributed according to the priority of claims. Secured creditors are paid first from the proceeds of the property they hold a claim against. Remaining funds are then distributed among unsecured creditors on a pro-rata basis.
  • Discharge of Debt: Once all available assets have been liquidated and the proceeds distributed, any remaining debt is typically discharged, meaning the debtor is no longer legally obligated to pay it. However, certain types of debts, such as those arising from fraud, may not be discharged.

• Fraudulent Transfers: Creditors have the right to challenge any fraudulent transfers made by the debtor before bankruptcy. If it can be proven that the debtor intentionally transferred assets to avoid repayment, the court may void those transfers, bringing the assets back into the bankruptcy estate.
• Disputes Among Creditors: Occasionally, disputes arise between creditors regarding the priority of their claims. These disputes can prolong the liquidation process and may require court intervention to resolve.

In 2024, new regulations were introduced to streamline the liquidation process, particularly regarding digital assets and intellectual property. These changes aim to modernize asset sales and improve the efficiency of bankruptcy proceedings, ensuring a faster and more transparent process for both creditors and debtors.

Liquidation in bankruptcy is a complex process involving the collection and sale of a debtor’s assets to satisfy creditor claims. The formation of the bankruptcy estate and the prioritization of creditor rights are essential components of this process. By understanding the steps involved and the rights available, both debtors and creditors can navigate the bankruptcy system more effectively.