What is Liquidate?

In the financial world, to liquidate something means to sell it for cash. Although this sounds harmless, in the corporate world the term often carries a connotation of failure, because it is most often used in discussions about Chapter 7 -- a section of U.S. bankruptcy law under which companies and individuals liquidate their assets in order to repay their debts.

How Does Liquidate Work?

Individuals, partnerships or corporations can liquidate assets. In the case of bankruptcy, when and how a borrower liquidates assets is a big deal. If all the debtor's assets are tax-exempt or subject to liens, there may not be any assets to liquidate and hence no money to distribute to creditors. If there are assets to liquidate, however, the creditors usually file a written claim so they can receive some of the proceeds. The trustee handles the liquidation and determines which creditors are paid first.

Why Does Liquidate Matter?

The last step in the effort to repay debt in bankruptcy is usually to liquidate everything. However, the steps preceding liquidation usually involve bankruptcy, which -- at the individual level -- virtually ruins a person's credit for several years, making it very difficult and expensive to borrow money.

For businesses, liquidation usually means closing for good and selling off the assets. In the end, if a company's stock or bonds are deemed worthless by the bankruptcy court, investors might be able to deduct their losses on their tax returns.