How Chapter 7 liquidation works: Toys R Us preps going-out-of-business sales

When a company decides it can no longer stay in business, it often ends up filing for Chapter 7 bankruptcy liquidation.

That appears to be the destiny of Toys R Us.

The toy retailer filed for Chapter 11 bankruptcy protection in September, aiming to cut debt, restructure its operations and reemerge as a healthier company.

But that blueprint seems to have failed.

Toys R Us is now set to convert its Chapter 11 case into a Chapter 7 case, paving the way for the company to sell off all of its assets and close its remaining stores — barring a last-second miracle to keep the company alive.

Here's what happens in Chapter 7:

1. The company files notice that it intends to go out of business.

2. A trustee is appointed to liquidate the company's assets. That usually triggers going-out-of-business sales.

3. Administrative and legal expenses are paid first.

4. Money raised from the sale of assets is used to pay off debts, with secured creditors first in line to get paid.

5. Unsecured creditors, such as vendors, get what's left. They rarely receive all that they're owed.