Legal Definitions - liquidation price

The liquidation price refers to the value at which an asset, or a collection of assets, is sold quickly, often under pressure or duress, to convert it into cash. This typically occurs when an individual or entity needs to pay off debts, settle an estate, or dissolve a business. Because the primary goal is often speed rather than maximizing profit, the liquidation price is usually lower than what the asset might fetch in a normal market sale.

Here are some examples to illustrate the concept of a liquidation price:

• Example 1: Business Bankruptcy

  A small restaurant chain files for bankruptcy. To satisfy its creditors, a court orders the immediate sale of its kitchen equipment, dining room furniture, and remaining food inventory. An auction is held where these assets are sold significantly below their original purchase price or even their current market value. The prices achieved at this auction are the liquidation prices for those assets, as the primary goal is to quickly generate funds to pay off the restaurant's debts rather than to maximize the sale price of each individual item.

• Example 2: Foreclosed Real Estate

  A homeowner defaults on their mortgage, and the bank forecloses on the property. To recover the outstanding loan amount, the bank puts the house up for a quick sale, often through an auction or by listing it below comparable market values. Even if the house is in good condition, it might sell for less than what it would fetch in a typical market transaction where both buyer and seller have ample time. The amount the house sells for under these circumstances is its liquidation price, reflecting the urgency of the sale to recoup the bank's investment.

• Example 3: Estate Sale of Collectibles

  After an individual passes away, their estate includes a large collection of antique stamps and coins. The executor of the estate needs to settle the estate quickly to distribute assets among heirs and pay any outstanding taxes. Instead of selling each item individually through specialized dealers over several months or years, the executor decides to hold a large estate sale or sell the entire collection to a single buyer at a discounted rate. The prices obtained for the stamps and coins in this expedited sale represent their liquidation prices, as the priority is a swift conversion to cash rather than achieving the highest possible value for each rare piece.