How the Term Liquidation is Used in the Bankruptcy Process


The term liquidation is used in a general sense as a noun to describe various actions by agreement or litigation to determine the precise amount of indebtedness, damages, or accounts held by a person or entity. This term when used in a general sense implies the actions of a person or entity to make clear, do away with, or convert any type of asset or personal property into cash. How is the term liquidation specifically used in the bankruptcy process?

A line of people waiting to enter the Circuit ...

Liquidation sale as a result of the company’s bankruptcy. (Photo credit: Wikipedia)

There are primarily two ways liquidation is used in the bankruptcy process. A bankruptcy can liquidate debts, damages, or accounts; or a bankruptcy can use liquidation to determine liabilities and apportion assets toward
discharging indebtedness.

Liquidation Used for Debts, Damages, or Accounts

Most of the time in the bankruptcy process, debtors are more familiar with the use of liquidation as the selling off of any non-exempt assets. The assets are sold for fair market value and the money gained from the sell of
the assets are used to reduce the debts, damages from litigation, or credit accounts held against a filing debtor.

A chapter 7 bankruptcy, often referred to as the Liquidation Bankruptcy, is a type of bankruptcy that uses this type of debt settlement in the bankruptcy process more than any other type of bankruptcy filed. When there is no assets to liquidate, the bankruptcy becomes a no-asset case.

The selling of assets to satisfy debts is normally done so by a panel trustee or an operating manager of a business, depending on the type of bankruptcy filed. When a trustee liquidates assets during any bankruptcy, there is usually enough money in the assets to warrant the sell of it from the bankruptcy estate. Otherwise, the asset is not liquidated, and either the filing debtor can buy back the asset at pennies on the dollar or potentially get the asset back at the close of the bankruptcy.

Liquidating the assets of a business is a different matter. Bankruptcy laws can become very complex. When there is enough assets in a business and the question of control over who can liquidate what assets and for how much comes into play, the legal maneuvering can become very costly when creditors and debtors fight for control.

Liquidation Used to Determine the Discharging of Indebtedness

Liquidation is a process just like bankruptcy is a process. Most debtors do not realize the liquidation process may be occurring even though assets are not necessarily being liquidated or debts completely paid. As part of the liquidation process, a trustee or operating manager must determine if liabilities can be satisfied when an apportionment of assets are made. In bankruptcy, debts are prioritized as to how they are paid. When debts are not completely satisfied by the liquidation process, the liquidation process can help to determine what debts or a portion of debts might be discharged by the bankruptcy.

Sometimes through the liquidation process, a trustee or operating manger finds out that the value of an asset is not worth liquidating. The
information gained from this attempt still helps in determining discharge of indebtedness.

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