In other words, liquidation is the process of closing a business, paying off creditors, and giving the investors whatever is left over.

Liquidations are far more common in bankruptcies and situations where the business is closing because it can’t support itself with revenues than any other instance. In a bankruptcy, the court generally takes control of the assets in order to sell them at auction to pay off the outstanding liabilities. In many cases, there aren’t enough assets to pay off creditors, so many of the unsecured lenders are out of luck. They won’t be repaid.

Assets are distributed based on the priority of various parties’ claims, with a trustee appointed by the Department of Justice overseeing the process. The most senior claims belong to secured creditors who have collateral on loans to the business. These lenders will seize the collateral and sell it – often at a significant discount, due to the short time frames involved. If that does not cover the debt, they will recoup the balance from the company’s remaining liquid assets, if any.