Definition of a Liquidation of Assets

In financial terminology, assets are items that have value. They are the opposite of debts, which signify money that is owed. When debts start to outweigh assets or become more than a business or individual can afford to repay, it may be necessary to liquidate assets in order to remain financially stable.

Liquidation of assets refers to selling off property in order to raise cash. In most cases the cash is intended for paying creditors. Both businesses and private individuals can liquidate their assets, which may include real estate, automobiles, equipment, raw materials and investments. Because cash is already a liquid asset, there is no need to liquidate it to pay creditors. However, all non-cash assets can be converted into cash for the purpose of paying debt or making purchases. Liquidation can occur regardless of the nature of the asset or the identity of the buyer.

Asset liquidation is a way for businesses and individuals to get money for essential purchases. For example, a retired individual may choose to liquidate a stock investment to raise cash for paying household bills. Asset liquidation is also an important part of the bankruptcy process. Chapter 7, also known as liquidation bankruptcy and available to both private individuals and businesses, allows a court to appoint a trustee who sells off, or liquidates, the bankrupt party's assets and pays the proceeds to creditors. Following liquidation, the court can discharge any remaining debt.

In a bankruptcy cases, certain types of property are exempt from liquidation. The specific types of property, as well as their maximum value, are defined by state and federal bankruptcy laws. In general, the exempt property for an individual who files for Chapter 7 bankruptcy includes home equity, retirement savings accounts and a personal automobile. This means that even when the court appoints a trustee to liquidate the individual's assets, those assets are allowed to remain in the individual's possession. In these cases, liquidation refers only to non-exempt property, including second homes and non-retirement investments.

The process for liquidating assets varies based on the type of asset and the situation. Businesses that want to raise cash for spending can attempt to sell their assets to other businesses. Individuals can sell investments on the open market or sell property through a broker, as in the case of real estate. In bankruptcy cases, the court-appointed trustee decides the means for liquidating assets. This may involve a public auction, published sale listing or sale on an open financial market.