# Understanding Liquidation: Process, Implications, and Examples

## 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](https://www.investopedia.com/terms/i/insolvency.asp), meaning it cannot pay its obligations when they are due. As company operations end, the remaining assets are used to pay creditors and shareholders, based on the priority of their claims. [General partners](https://www.investopedia.com/terms/g/generalpartner.asp) are subject to liquidation.

Liquidation can also mean selling poorly-performing goods at prices lower than their cost or the desired price.

### Key Takeaways

*   Liquidation involves ending a business and distributing its remaining assets to creditors and shareholders due to insolvency.  
    
*   During liquidation, assets are distributed based on claim priority, with secured creditors paid first.  
    
*   Liquidation commonly occurs under Chapter 7 of the U.S. Bankruptcy Code, though it might not always involve bankruptcy.  
    
*   The process can also refer to selling securities or inventory at discounted prices, not necessarily due to bankruptcy.  
    

![Liquidation](https://www.investopedia.com/thmb/ohQ8xHtdhpNc1SERuZg-r8rPMlM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Liquidation-4193561-Final-699e67d885c243c39cac2985b16d51cb.jpg)

*— Investopedia / Paige McLaughlin*

## Understanding the Liquidation Process

Chapter 7 of the U.S. Bankruptcy Code governs liquidation proceedings. It is rare, but solvent companies can also file for [Chapter 7](https://www.investopedia.com/terms/c/chapter7.asp). Not all bankruptcies involve liquidation; [Chapter 11](https://www.investopedia.com/terms/c/chapter11.asp), for example, involves rehabilitating the bankrupt company and restructuring its debts. Under Chapter 11 bankruptcy, the company continues to exist after liquidating obsolete inventory, closing underperforming branches, and restructuring debts.

Unlike when individuals file for Chapter 7 bankruptcy, business debts still exist after Chapter 11 bankruptcy. The debt remains until the statute of limitations expires, and without a debtor to pay, creditors must write it off.

## How Assets Are Distributed in Liquidation

Assets are distributed based on the [priority of various parties’](https://www.investopedia.com/ask/answers/09/corporate-liquidation-unpaid-taxes-wages.asp) claims, with a trustee appointed by the U.S. Department of Justice overseeing the process. [Secured creditors](https://www.investopedia.com/terms/s/secured-creditor.asp), with collateral on business loans, have the most senior claims. These lenders seize the collateral and often sell it at a significant discount due to time constraints. 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 only get remaining assets if any are left, which is unlikely. In such cases, investors in preferred stock have priority over holders of common stock. Liquidation may also involve selling inventory at steep discounts. It is not necessary to file for bankruptcy to liquidate inventory. 

## Liquidation and Securities: What to Know

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](https://www.investopedia.com/terms/s/shortselling.asp) 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](https://www.investopedia.com/terms/m/maintenancemargin.asp), or they have demonstrated a reckless approach to risk-taking.

## Real-World Liquidation Example

Company ABC has been in business for 10 years and has been generating profits throughout its run. In the last year, however, the business has struggled financially due to a downturn in the economy. It has reached a point where ABC can no longer pay any of its debts or cover any of its expenses, such as payments to its suppliers.

ABC has decided that it will close up shop and liquidate its business. It enters into Chapter 7 bankruptcy and its assets are sold off. These include a warehouse, trucks, and machinery with a total value of $5 million. Currently, ABC owes $3.5 million to its [creditors](https://www.investopedia.com/terms/c/creditor.asp) and $1 million to its suppliers. The sale of its assets during the liquidation process will cover its obligations.

## What Is the Liquidation of a Company?

The liquidation of a company happens when company assets are sold when it can no longer meet its financial obligations. Sometimes, the company ceases operations entirely and is deregistered. The assets are sold to pay back various claimants, such as creditors and shareholders. Not all assets will sell at 100% of their value, so the business and bankruptcy courts will determine an [estimated recovery value](https://www.investopedia.com/terms/e/estimated-recovery-value-erv.asp) of the property to distribute to creditors.

## What Does It Mean to Liquidate Money?

To liquidate means to convert assets into cash. For example, a person may sell their home, car, or other asset and receive cash for doing so. This is known as liquidation. Many assets are assessed based on how liquid they are. For example, a home is not very liquid because it takes time to sell a house, which involves getting it ready for sale, assessing the value, putting it up for sale, and finding a buyer. On the other hand, stocks are more liquid as they can be easily sold and cash received from the sale (if they have appreciated).

## Is a Company Dissolved After Liquidation?

No, a company is not dissolved after liquidation. Dissolving a company and liquidating it are two separate procedures. Liquidating a company means selling off its assets to claimants whereas dissolving a company is deregistering it.

## Final Insights on Liquidation

When a company cannot meet its financial obligations and becomes insolvent, it enters the [liquidation process](https://www.investopedia.com/articles/exchangetradedfunds/09/etf-out-of-business.asp). Liquidation involves winding down business operations and distributing assets to meet creditors' and shareholders' claims in order of their priority.

Typically governed by Chapter 7 of the U.S. Bankruptcy Code, this process can also refer to the act of selling off securities or inventory to convert holdings into cash. Whether applied to a company or securities, liquidation signifies the final phase of financial resolution, prioritizing creditors over shareholders and resulting in the business's closure and deregistration.

> **Article Sources**
>
> 1.  United States Courts. "[Chapter 7 - Bankruptcy Basics](https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics)."
>     
> 2.  United States Courts. "[Chapter 11 - Bankruptcy Basics](https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics)."
>     
> 3.  U.S. Securities and Exchange Commission. "[Bankruptcy: What Happens When Public Companies Go Bankrupt?](https://www.sec.gov/reportspubs/investor-publications/investorpubsbankrupthtm.html)"
>     
> 4.  U.S. Securities and Exchange Commission. "[Stocks](https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks)."