Liquidated Assets Definition: Everything You Need to Know
The liquidated assets definition refers to anything of value that is sold off to pay creditors when a business is closing or restructuring.3 min read
2. What Is Liquidation?
3. What Is a Liquidation Specialist?
4. What Are Creditors?
5. What Is Bankruptcy?
Updated November 17, 2020:
The liquidated assets definition refers to anything of value that is sold off to pay creditors when a business is closing or restructuring. The cash that comes from liquidating assets is usually paid to creditors to satisfy the company's debts. While this is most commonly a business proceeding, it's also available to individuals.
Both businesses and private individuals can liquidate their assets, which may include real estate, automobiles, equipment, raw materials, and investments.
What Are Assets?
In the financial world, an asset is anything that has a value. Assets are the opposite of debts, which represent money owed to another party. Assets can include:
- Real estate.
- Raw materials.
- Financial investments.
- Store fixtures.
- Decorations such as art, wall hangings, and rugs.
- Office equipment.
- Window treatments.
- Packaging supplies.
Since cash is already liquid, you don't have to liquidate it in order to use it to pay creditors.
What Is Liquidation?
Liquidation is the selling of assets to raise cash, usually to pay off debts. Typically, those assets are the company's inventory, and they're sold at a deep discount. Any remaining assets may be distributed to the company's owners.
Liquidation, in most cases, is part of closing down or restructuring a business. Once liquidation is complete, the company is no longer open for business. The following circumstances might call for liquidation:
- The business could be moving to a new location. Owners can sometimes save money by selling off assets rather than transporting them to the new location.
- If debts grow larger than assets or the payments are too large for the company to afford, the owners may have to liquidate assets to remain in stable operation.
- The business or individual may need money for upcoming purchases. A retired person, for example, may want to liquidate stock to pay bills. The owner of a vacation home may sell it to pay for a child's college.
- Liquidating assets is part of the process for filing bankruptcy.
- If an investor wants to leave the business, liquidation can be a means for that person to "cash out."
What Is a Liquidation Specialist?
The challenge with liquidation is that often you don't have much time to sell off the assets. This leads to deep discounts, and the cash taken in is often well below retail value. A company that specializes in liquidation may buy all of the assets at once, including the inventory, and then sell them to other stores.
In fact, some retailers perform a liquidation function too. Big Lots, Tuesday Morning, and Ollie's are some examples of companies that buy leftover inventory at a fraction of the retail. Then they resell the products in their own stores, usually at less than full retail but still at a profit.
What Are Creditors?
Creditors are those to whom the business owes a debt. Some types of creditors include:
- Secured creditors: They hold a lien against the business itself or at least a claim on assets to repay the debt. One example is a company that leases a car; the leaseholder has a lien against the car. The creditor can take the car back if the business stops paying the note.
- Unsecured creditors: These include credit card companies and do not hold a lien or any type of security interest, in any assets. Unsecured creditors only get paid after the secured creditors have been satisfied.
- Stakeholders: These are individuals or other entities who have an interest in seeing the business succeed. They have no formal claim on the assets. Employees are an example of stakeholders.
What Is Bankruptcy?
Liquidation is often, but not always, part of the process of filing for bankruptcy. This process is available to businesses and individuals alike.
Chapter 7 bankruptcy is also known as liquidation bankruptcy. The court takes control of the filing party's assets and orders them sold at auction to satisfy liabilities. The judge also appoints a caretaker called a trustee to sell off (liquidate) the assets of the person filing for bankruptcy. The trustee then uses the proceeds to pay creditors. Once that is complete, the court can choose to discharge the rest of the debt.
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