Liquidation Definition & Meaning

What Is Liquidation?

Liquidation refers to selling assets and turning them into cash. People typically liquidate assets for a specific reason, such as raising money or paying off debt. 

A liquidation can be either voluntary or forced. Voluntary liquidation happens when you choose to sell property, while forced liquidation means you’re required to sell property as part of a legal process.

Liquidation is a requirement of Chapter 7 bankruptcy. A trustee sells your non-exempt property and uses the proceeds to pay as much as possible toward your debts.

Liquidation: A Comprehensive Breakdown

Liquidation is a common part of Chapter 7 bankruptcy, which is why it's also known as liquidation bankruptcy. After you file Chapter 7, a bankruptcy trustee liquidates your non-exempt assets. The proceeds are then used to pay as much of your debt as possible. After that, most of your remaining unsecured debt is discharged, meaning it’s forgiven.

Liquidation bankruptcy is one of the faster ways to discharge debt. The entire process normally takes anywhere from three to six months. A Chapter 7 bankruptcy stays on your credit history and could affect your credit score for up to 10 years. The impact on your credit score diminishes over time, though.

To qualify for Chapter 7 bankruptcy, you need to pass a means test. You must show that your income is below the state median income or that you don’t make enough money for Chapter 13 bankruptcy, which would require monthly payments toward your debt for three to five years.

You normally don’t need to liquidate everything you own during Chapter 7 bankruptcy. You can keep exempt property, which is property that doesn’t need to be given up for liquidation. Your state’s bankruptcy laws determine what you can keep and what you need to give up.

Examples of Exempt Property and Non-Exempt Property

Bankruptcy law generally allows you to exempt property that is a “necessity of modern life” from liquidation. If you need property to live or work, you could be able to keep it. Here are some common examples of exempt property:

• Retirement accounts

• A primary motor vehicle up to a certain value

• Home equity up to a certain amount

• Clothing that’s reasonably necessary

• Furniture, appliances, and other household goods that are reasonably necessary

• Equipment and tools you use for work

Here are some examples of non-exempt property that are usually liquidated during bankruptcy:

• Cash and bank accounts

• Investments, such as stocks and bonds

• A second vehicle

• A second home

• Any valuable items not necessary for life or work

Laws vary from state to state. If you’re considering bankruptcy and want to better understand your options, research the bankruptcy laws for your state and consult with a bankruptcy lawyer.