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What are the differences between liquidation and bankruptcy?
Let us learn the concepts of liquidation and bankruptcy before understanding their differences.
Liquidation
Liquidation is the process of winding up a company by selling their assets and distributing them based on solvent or insolvent business. Liquidation occurs when a company decides or reaches a point when it decides not to continue their business for various reasons.
The main reason to liquidate the asset is due to insolvency, where business reaches a point that it can’t pay the due payments. The person who manages the liquidation process is called a liquidator.
Types
Voluntary liquidation (members) −Business able make payments but owner makes a choice to wind up.
Voluntary liquidation (creditors) −Shareholders vote (more than 75% shareholders vote) to liquidate.
Compulsory liquidation − Company unable to pay its due and company director applies directly to court and requests to start the liquidation process.
Bankruptcy
When an organization is unable to pay to their creditors, then the company files a petition in court for bankruptcy. Then, the outstanding debts are calculated and paid from the company’s assets.
Terms used in bankruptcy are as follows −
Bankruptcy trustee − Appointed by court of law on behalf of creditors.
Credit counseling − It is an agency where creditors meet individually or in groups before filing for bankruptcy.
Discharged bankruptcy − When proceedings of bankruptcy are completed then bankruptcy is considered as discharged.
Exempt property − The state law determines the properties which may be allowed to be kept by the debtor.
Lien − It is a legal action which allows creditors to sell, hold and take real estate of debtors for security of a debt.
Liquidation − Sale of nonexempt properties of debtors.
Means test − This test takes information related to income, assets, unsecured debt and expenses. If the debtor fails this test then the bankruptcy file may be dismissed.
Reaffirmed account − Reaffirming the account (agrees to pay debt that could be discharged in proceedings); commitment to pay debt allows debtor to keep a part of collateral (cars etc.). If they fail, these are seized as bankruptcy proceedings.
Secured debt − Debt is backed by re-claimable properties.
Unsecured debt − Creditors hold no tangible collators (like credit cards etc.)
Differences
The major differences between liquidation and bankruptcy are as follows −
| Liquidation | Bankruptcy |
|---|---|
| Company finally wound up. | Company unable to pay debts further. |
| Reason is financial instability or other reasons. | Reason is insolvency. |
| Compulsory/voluntary mode. | Voluntary/involuntary. |
| Covers companies only. | Covers both persons and companies. |
| Assets are sold. | Debts are restructured. |
| Remaining debts will be forgiven. | All debts should be paid back (through future earnings). |
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