Liquidation can also refer to the process of selling off inventory, usually at steep discounts.
The company’s operations are brought to an end, and its assets are divvied up among creditors and shareholders, according to the priority of their claims. Not all bankruptcies involve liquidation; Chapter 11, for example, involves rehabilitating the bankrupt entity and restructuring its debts.Liquidation is the process of bringing a business to an end and distributing its assets to claimants.Once the process is complete, the business is dissolved.This is not the same as its debts being discharged, as happens when an individual files for Chapter 7.The debts still exist in theory, at least until the statute of limitations has expired, but there is no debtor to pay them, so they must be written off in practice.
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. 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.