Loading the player...

What is 'Liquidation'

Liquidation in finance and economics, is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they come due. As company operations end, the remaining assets are used to pay creditors and shareholders, based on the priority of their claims.  

BREAKING DOWN 'Liquidation'

Chapter 7 of the U.S. Bankruptcy Code governs liquidation proceedings. Solvent companies may also file for Chapter 7, but this is uncommon. Not all bankruptcies involve liquidation; Chapter 11, for example, involves rehabilitating the bankrupt company and restructuring its debts.

The business is no longer in existence once the liquidation process is complete. Unlike when individuals file for Chapter 7 Bankruptcy, the business debts still exist. The debt will remain until the statute of limitation has expired, and as there is no longer a debtor to pay what is owed, the debt must be written off by the creditor.

Distribution of Assets During Liquidation

Assets are distributed based on the priority of various parties’ claims, with a trustee appointed by the Department of Justice overseeing the process. The most senior claims belong to secured creditors, who have collateral on loans to the business. These lenders will seize the collateral and sell it—often at a significant discount, due to the short time frames involved. If that does not cover the debt, they will recoup the balance from the company’s remaining liquid assets, if any.

Next in line are unsecured creditors. These include bondholders, the government (if it is owed taxes) and employees (if they are owed unpaid wages or other obligations). Finally, shareholders receive any remaining assets, in the unlikely event that there are any. In such cases, investors in preferred stock have priority over holders of common stock. 

Liquidation can also refer to the process of selling off inventory, usually at steep discounts. It is not necessary to file for bankruptcy to liquidate inventory.

Trading: Liquidating A Position

Liquidation can also refer to the act of exiting a securities position. In the simplest terms, this means selling the position for cash; another approach is to take an equal but opposite position in the same security, for example, by shorting the same number of shares that make up a long position in a stock. A broker may forcibly liquidate a trader’s positions if the trader’s portfolio has fallen below the margin requirement or she has demonstrated a reckless approach to risk-taking.

RELATED TERMS
  1. Chapter 7

    Chapter 7, known as straight or liquidation bankruptcy, of Title ...
  2. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
  3. Liquidity Crisis

    A liquidity crisis refers to the absence of cash flow at a business ...
  4. Liquid Market

    A liquid market is one where there are many bids and offers and ...
  5. Chapter 11

    Named after the U.S. bankruptcy code 11, Chapter 11 is a form ...
  6. Receiver

    A receiver is a person appointed as custodian of a person or ...
Related Articles
  1. Personal Finance

    The Other Personal Bankruptcy Option: Chapter 13

    In a Chapter 13 bankruptcy, filers develop a plan to repay all or part of their "past due" debt. Any allowable debt left afterward is discharged.
  2. Taxes

    5 Myths About Personal Bankruptcy

    There are some persistent myths that hover over the process of bankruptcy that are either half-truths or completely false.
  3. Investing

    Understanding Liquidity Risk

    Make sure that your trades are safe by learning how to measure the liquidity risk.
  4. Small Business

    Taking Advantage Of Corporate Decline

    A bankrupt company can provide great opportunities for savvy investors.
  5. Investing

    Financial Analysis: Solvency vs. Liquidity Ratios

    Solvency and liquidity are equally important for a company's financial health.
  6. Taxes

    When To Declare Bankruptcy

    When is bankruptcy the best or only route– and when is it better to look at alternative solutions? And should you always hire a lawyer?
  7. Taxes

    How To Survive A Bankruptcy Filing

    Learn how to make filing for bankruptcy less painful so you can successfully rebuild your financial life.
  8. Taxes

    Changing The Face Of Bankruptcy

    A 2005 law attempts to unmask fraudulent debtors and still save those who are struggling. Will it affect you?
RELATED FAQS
  1. What is liquidity management?

    Take a look at the different definitions of liquidity, and find out how investors and businesses attempt to reduce exposure ... Read Answer >>
  2. What is the difference between compulsory and voluntary liquidation?

    Learn about the primary differences between voluntary liquidation and compulsory liquidation, two ways of selling off company ... Read Answer >>
  3. What are the differences between Chapter 7 and Chapter 13 bankruptcy?

    Read about some of the primary differences between a Chapter 7 and Chapter 13 bankruptcy, including who may be ineligible ... Read Answer >>
Hot Definitions
  1. Receivables Turnover Ratio

    Receivables turnover ratio is an accounting measure used to quantify a firm's effectiveness in extending credit and in collecting ...
  2. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  3. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  4. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  5. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  6. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
Trading Center