Dena Standley | October 19, 2022
Summary: Liquidating involves selling your assets and property in exchange for cold, hard cash. Here is SoloSuit's guide liquidation, how it relates to debt, and the benefits of liquidating your assets.
Liquidation refers to selling property or assets on the open market to convert them into cash or cash equivalents. Similarly, liquidation means ending a company's operations and distributing its assets to creditors.
Liquidating assets can be either voluntarily or forcedly. The funds required for new investments or purchases come from voluntary liquidation. Forced liquidations might be necessary when an entity is forced to liquidate assets as part of bankruptcy proceedings. Liquidation can also mean selling inventory at a discount.
Land, buildings, properties, machinery, furniture, vehicles, equipment, tools, and inventory are all examples of assets. A company or an individual is liquidated when these assets don't earn sufficient returns to meet business expenses. Liquidators and insolvency practitioners handle the dissolution professionally.
Discover more on liquidation below.
Liquidated debt has a definite and known amount, while unliquidated debt includes unknown debt. The situation may arise when debt amounts are in dispute or contingent on an event, such as a court verdict. If a court order or agreement determines the final amount owed, unliquidated debt is liquidated.
Liquidated Debt vs. Unliquidated Debt
The debt amount is known
The debt amount is unknown
Both parties agree as far as the amount of the debt is concerned
Debt amount is disputed, or something has to happen in the furutre of the debt amount to be determined
Chapter 7 bankruptcy allows you to liquidate your assets. Individuals who cannot make regular monthly payments to their debts can apply for it. Businesses that wish to cease operations can also file for Chapter 7. A debtor can get relief from Chapter 7 regardless of the number of debts owed or the debtor's status. The Chapter 7 trustee converts the debtor's assets into cash for distribution to creditors.
Please note not all assets are readily convertible into cash before liquidating them. They are categorized as non-liquid or fixed assets. Conversion of these assets into money is complex, and they lose some of their value. Examples include:
Liquid assets refer to assets that can quickly be converted into cash or cash equivalents. Among the most common examples are:
If you intend to liquidate a credit card, consult a certified accountant and an attorney to determine if these methods violate local laws or your credit card terms. You might face challenges when converting credit to cash, depending on your choice.
Borrowing money from a 0% APR credit card, for example, requires payment before the interest-free period expires. The interest rate on a standard cash advance from a credit card is ridiculous, ranging from 20 to 30%! If you do a 0% APR balance transfer right away, you'll save money, so only the cash advance fee and the interest will be added to your loan costs. Credit cards should always come with a word of warning. Using credit cards to liquidate debt can create a problem larger than the one it solves. Please evaluate your situation carefully before turning a credit card into a liquidated asset.
Although debt can be costly, should you liquidate potentially profitable investments to eliminate it? You waste more money on interest charges the longer you keep in debt. Holding on to unhealthy debt can hurt your credit rating, which makes it more difficult for you to borrow in the future.
Before exploring liquidating investments or other assets, contact your lender about a balanced liquidation plan. A balance liquidation plan (BLP) is a payment plan designed for consumers who can no longer make their monthly payments. It benefits lenders because they often lose substantial money when a consumer is forced to default or file bankruptcy. If your bank is willing to implement a BLP, the account will appear as closed on your credit report instead of delinquent. This can protect your credit score, allowing you to borrow at reasonable interest rates in the future. Potential drawbacks to a BLP include that the bank gets to set the terms, including the interest rate. Banks are not mandated to offer to a BLP, so check with your lender to see if it is an option.
Having a lot of debt and not having the cash on hand to pay it off in a reasonable time frame may lead you to tap your investment portfolio, sell off investments, and use them to pay off your debt. The amount of debt compared to the interest you stand to save if you sell off investments will determine whether it is worthwhile to sell them to pay your debts.
For example, if you have a balance on a credit card with an interest rate of 18%. You might be better off liquidating an asset that generates a 6% return each year and, using it, pay down your debt since you'll be better off in the long run.
Several people operate their businesses by using a corporation to protect their assets if the corporation fails and to avoid personal liability for the company's debts. If you and the company can't pay the debt, then the company may be forced into liquidation. When you operate a business through a corporation, the corporation owns the company's assets and handles any debts that may accrue. Directors and shareholders are not personally responsible for the company's trading debts or other obligations.
If you owe any unpaid liabilities to the company, you may be required to give the bank or supplier a personal guarantee. You can be legally responsible for the payment if the company cannot pay. It is possible for the company and you to come under financial pressure if the business is not doing well.
If you are a director of a company that has trouble paying its debts when they are due, seek professional advice on liquidating debt. You might become liable for the company's debts even if you did not give a personal guarantee.
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