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Difference between bankruptcy and liquidation

Difference between bankruptcy and liquidation

The failure it can be understood as a financial state, in which a person declared insolvent by the court, resulting in legal orders aimed at resolving the insolvency, that is to say to dispose of personal property to fulfill obligations. On the other hand, the liquidation it can be defined as the process of liquidating the company's affairs from divestment activities, in order to extinguish the liabilities of bond creditors, employees and other parties.

While bankruptcy is nothing more than a legal scheme, in which the insolvent / bankrupt person seeks relief, while winding up an entity's definitive shutdown procedure. Before understanding the reconstruction of a company, you need to know the fundamental differences between bankruptcy and liquidation.

Comparative chart

Basis for comparison Failure Liquidation
Sense Bankruptcy is a state in which a person or entity is unable to pay off its debts further. Liquidation is a process in which a company is finally liquidated.
mode Voluntary or involuntary Mandatory or voluntary
coverage People and companies Only companies
reasoning Insolvency Financial instability or any other reason

Definition of bankruptcy

Bankruptcy is a situation in which an individual or entity becomes bankrupt. The person or company is unable to repay any outstanding debts owed by him. the final stage of insolvency and a petition filed in court by the debtor or any creditor. In this procedure, the personal ownership of the insolvent is discharged from the court by authorizing a person commonly known as an official assignee. The official transferee distributes the amount received from the private property among the various creditors based on their interest.

After the discharge of secured and unsecured debts of the bankrupt person, he is relocated to the court again.

Definition of Liquidation

The process in which the legal status of the company known as liquidation is completely closed. The liquidation also known as the liquidation of the company. Shareholders or creditors often drive it and a petition filed in court for the liquidation of the organization.

In this process, the company's assets are sold to settle the claims and the accounts are permanently resolved. To this end, a liquidator is appointed by the court for the dissolution of the company. The residual amount after creditors' extinction distributed among the shareholders of the entity. In this way, the company's future activities are terminated, therefore entirely closed and no further agreements are made on behalf of the company.

Key differences between bankruptcy and liquidation

The following points are substantial as regards the difference between bankruptcy and liquidation:

  1. The legal status in which a person or a company becomes bankrupt considered as bankruptcy while the procedure in which the activity of a company definitively concluded is considered a liquidation.
  2. Liquidation limited to the company only, while bankruptcy not limited to the company, people can also become bankrupt here.
  3. Bankruptcy can be done voluntarily (petition of the person or company itself) or involuntarily (petition filed by creditors), but liquidation can be done voluntarily (petition filed by shareholders) or mandatory (petition filed by creditors).
  4. The significant difference between the two that bankruptcy arises from financial crises or insolvency, but liquidation may be due to financial instability or for some other reason.


  • Sale of assets and payment of liabilities.
  • Court order
  • It can be done voluntarily.
  • Debts are more than assets.


Bankruptcy and liquidation are both the worst kind of situation that can ever happen. However, in the event of bankruptcy, the person declared bankrupt is given a fresh start, but there is no possibility of a fresh start in the event of liquidation. Since liquidation limited to companies only, it is not necessary for all liquidated companies to be bankrupt. Since there are many cases in which the company is financially solid, but still liquidated because its shareholders have thus resolved.