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Voluntary and Involuntary Liquidation

In a voluntary liquidation, the company’s owners decide how to liquidate its assets and how to disburse the funds to its creditors, usually without the involvement of a court.


Companies may decide to liquidate for several reasons, including the sale of a company following the death of an owner. In this case, once assets are liquidated and outstanding debts are satisfied, the remaining assets are divided among the company’s shareholders.

In some cases, a company may choose to voluntarily liquidate its holdings to enable it to operate more cost-effectively and/or efficiently, or even to allow it to remain in business. For instance, a large corporation with multiple smaller business entities may decide to sell off one or more of those subsidiaries to enable the corporation to remain in business or become more profitable.


Voluntary liquidation may also occur when a lender declares default on a loan due and has filed a lawsuit or secured a judgment against the company or when the lender has begun foreclosure proceedings. The company may choose to sell off its assets to satisfy the debt before the lender can do so.  While this is technically a voluntary liquidation, it is in response to actions taken by the company’s lender; therefore, it’s often referred to as a forced-but-voluntary liquidation.


Involuntary liquidation occurs when creditors force the company to sell off its assets without its consent.  This is usually done through the bankruptcy court or through a judicial sale process, like a foreclosure.   Involuntary bankruptcy is also regulated under federal bankruptcy laws, and it can only occur when certain requirements are met, such as:

  • If a company has at least 12 creditors, the involuntary petition requires that three or more of those creditors file the petition, and the total claim must be at least $15,325* more than the value of any liens that may be securing those claims.
  • If there are fewer than 12 creditors, one creditor may file the petition.
  • Once the petition is filed, additional creditors may join later.
  • In their petition, the creditors must state whether they’re seeking to have the company placed in Chapter 7 (liquidation) or Chapter 11  (reorganization)bankruptcy.

* This amount is adjusted every three years under the bankruptcy code with the next adjustment due in April 2016.


An involuntary liquidation differs from voluntary liquidation in several important ways:

  • Unlike voluntary bankruptcy, when an involuntary petition is filed the company does not enter bankruptcy immediately, and it usually may continue to do business and buy, use, sell or otherwise transfer its property in the normal course of business;
  • The company may contest the petition by filing a motion of its own within a specified time frame set forth by the bankruptcy code (currently 21 days);
  • The company can consent to the petition, and if Chapter 7 (liquidation) has been sought, the company may choose to convert it to a Chapter 11 (reorganization) case;
  • If the court dismisses the creditor’s petition, they  may be held liable for court costs as well as the company’s legal fees, and may be held liable for damages if the petition is found to have been filed in bad faith.

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