Liquidation of assets is done when a business is closed and assets are sold to pay off the creditors.
Liquidating assets generates cash, which is normally paid to creditors to settle the company’s debts. While this is most typically used in business, it can also be used by people. Assets such as real estate, automobiles, equipment, raw materials, and investments can be liquidated by both businesses and individuals.
Meaning of Assets
Assets are those which are owned by a business that has some resale value. The examples of assets are:
- Real estate.
- Raw materials.
- Financial investments.
- Store fixtures.
- Decorations such as art, wall hangings, and rugs.
- Office equipment.
- Window treatments.
- Packaging supplies.
Cash is not included in the list because it is already liquid and not needed to be sold to pay off.
Meaning of Liquidation
The sale of assets to raise cash, usually to pay off debts, is known as Asset liquidation. Those assets are usually the company’s inventory, which is sold at a steep discount. Any leftover assets may be divided among the owners of the company. There are also some assets that are considered for Asset Appraisal.
In most circumstances, liquidation is a part of a business’s closure or restructuring. The company will no longer be open for business once the liquidation process is completed. The following situations may necessitate liquidation:
- It’s possible that the company is relocating. Instead of relocating assets to the new location, owners might sometimes save money by selling them.
- If debts exceed assets, or payments become too high for the company to bear, the owners may be forced to liquidate assets to keep the business afloat.
- A company or an individual may require funds for planned purchases. For example, a retired person may need to liquidate stock to pay bills. A vacation home owner may sell it to help pay for a child’s college education.
- Asset liquidation is a necessary aspect of the bankruptcy procedure.
- Liquidation can be a way for an investor to “cash out” if they desire to quit the company.
Who is a Liquidation Expert?
The problem with liquidation is that you don’t always have a lot of time to sell the assets. This results in steep reductions, and the money collected is frequently much below retail value. A liquidation company may buy all of the assets, including the inventory, all at once and then sell them to other stores.
In reality, several retailers also have a liquidation department that buys the assets. The products are then resold in their stores for a profit, usually at a lower price than full retail.
Meaning of Creditors
Creditors are those who owe a debt to the company. Few types of creditors are-
- Secured Creditors
Secured creditors have a lien on the company or at the very least a claim on assets to settle the loan. A corporation that leases a car, for example, may have a lien against the vehicle. If the business fails to pay the debt, the creditor has the right to repossess the vehicle.
- Unsecured creditors
Credit card businesses are examples of unsecured creditors, as they have no lien or security interest in any assets. Secured creditors are paid first, and then unsecured creditors are compensated.
Individuals or other entities with a vested interest in the company’s success are referred to as stakeholders. They don’t have a legal claim to the assets. Stakeholders include people like you and me.
Meaning of Bankruptcy
Liquidation is frequently, but not always, an element of the bankruptcy process. This procedure is open to both organizations and individuals.
Liquidation bankruptcy is another name for Chapter 7 bankruptcy. The court seizes the assets of the filing party and orders that they are sold at auction to pay the filing party’s debts.
In addition, the judge appoints a trustee to sell (liquidate) the assets of the person filing for bankruptcy.The trustee then distributes the funds to creditors. After that, the court might decide whether or not to discharge the remaining debt.