How to avoid Forced Liquidation

To ensure your Bitcoin-backed loan stays secure and you avoid the process of forced liquidation, it’s important to understand what does forced liquidation mean, how does liquidation work and to know the steps you can take to prevent it. Here's what you need to know about forced liquidation and how to protect yourself.

What is forced liquidation?

Forced liquidation happens when your LTV ratio (Loan-to-Value ratio) rises above 90% and you don’t take action to fix it. This usually occurs when Bitcoin’s price drops, your collateral loses value, and your loan becomes too risky. The Borrower should either increase the amount of collateral or partially repay the debt to keep the LTV ratio at an appropriate level, between 30 and 70%.

Before a forced liquidation starts, the Borrower will get three margin call notifications. What is a margin call? A margin call means a note of warning that your collateral value has fallen below the required level according to your contract.

If you don’t respond and your LTV goes higher than 90%, Debifi notifies both the Borrower and the Lender as well as the Authorized Key Holder that the forced liquidation process has started. You can’t take any actions if the forced liquidation process has started.

The contract is then closed, and the collateral is transferred to the Lender.

Forced liquidation can also occur if the Borrower doesn’t repay the loan. After the contract ends, the Borrower has 24 hours to repay the debt. If they don’t do it, forced liquidation begins and the collateral will be liquidated in favor of the Lender. The collateral will be liquidated based on the exchange rate of bitcoin to USD at the time of liquidation.

Important things to know about forced liquidation

For Lenders:

· Even in forced liquidation, your interest is safe. There is no risk of losing your interest — all loans on Debifi are over-collateralized.

· After liquidation of the contract, you receive the loan amount + interest in bitcoin. Since it is a volatile asset, lenders choose to monitor bitcoin price closely and hedge their risks by converting the bitcoin into fiat or stablecoins in a timely manner.

For Borrowers:

· Be aware that forced liquidation includes a 5% liquidation fee. It is calculated from the outstanding debt at the time of liquidation (remaining loan amount + accrued interest).

· If the collateral amount in the multisig escrow exceeds your outstanding debt, the difference is refunded to you.

1. Choose a low LTV ratio

Your LTV ratio shows how your loan compares to your collateral value. If BTC price drops then your LTV rises and therefore you may need to add collateral.

At the moment of signing the contract take into consideration:

Higher LTV = higher risk of contract liquidation.

Lower LTV = more protection but also more collateral.

2. Add extra BTC to escrow

Even if your loan starts at, say, 70% LTV, you can always deposit more collateral to protect yourself.

Adding more BTC to the multisig escrow gives you more time to react if the Bitcoin price goes down.

3. Monitor the Bitcoin price

If Bitcoin starts falling, log in to the Debifi account and check the current LTV of your contract.

A quick adjustment can fully prevent liquidation.

4. Use a valid email address

Debifi sends all notifications, including margin calls, to your email.

Make sure you have access to it. Always use a valid email to create an account on Debifi.

5. Repay the debt on time (or earlier)

Don’t wait until the last minute. You can close your loan early anytime without extra fees.

6. Act immediately when you receive a margin call

A Margin call means that your LTV ratio is too high.

Fix it by:

· adding more collateral

· partially repaying your loan.

Forced Liquidation is easy to avoid when you stay ahead of your LTV ratio.

Monitor your loan, react to notifications, and let your BTC keep working for you — without selling it.