diff --git a/x/cdp/keeper/auctions.go b/x/cdp/keeper/auctions.go
index 7c8397b9..5e6e422b 100644
--- a/x/cdp/keeper/auctions.go
+++ b/x/cdp/keeper/auctions.go
@@ -118,9 +118,10 @@ func (k Keeper) CreateAuctionsFromDeposit(ctx sdk.Context, dep types.Deposit, de
 	for depositAmount.GTE(auctionSize) {
 		// figure out how much debt is covered by one lots worth of collateral
 		depositDebtAmount := (sdk.NewDecFromInt(auctionSize).Quo(sdk.NewDecFromInt(totalCollateral))).Mul(sdk.NewDecFromInt(debt)).RoundInt()
-		// start an auction for one lot, attempting to raise depositDebtAmount
+		penalty := k.ApplyLiquidationPenalty(ctx, depositDenom, depositDebtAmount)
+		// start an auction for one lot, attempting to raise depositDebtAmount plus the liquidation penalty
 		_, err := k.auctionKeeper.StartCollateralAuction(
-			ctx, types.LiquidatorMacc, sdk.NewCoin(depositDenom, auctionSize), sdk.NewCoin(principalDenom, depositDebtAmount), []sdk.AccAddress{dep.Depositor},
+			ctx, types.LiquidatorMacc, sdk.NewCoin(depositDenom, auctionSize), sdk.NewCoin(principalDenom, depositDebtAmount.Add(penalty)), []sdk.AccAddress{dep.Depositor},
 			[]sdk.Int{auctionSize}, sdk.NewCoin(k.GetDebtDenom(ctx), depositDebtAmount))
 		if err != nil {
 			return sdk.ZeroInt(), sdk.ZeroInt(), err
diff --git a/x/cdp/keeper/seize.go b/x/cdp/keeper/seize.go
index fcb15756..ca2efa52 100644
--- a/x/cdp/keeper/seize.go
+++ b/x/cdp/keeper/seize.go
@@ -10,11 +10,11 @@ import (
 // SeizeCollateral liquidates the collateral in the input cdp.
 // the following operations are performed:
 // 1. updates the fees for the input cdp,
-// 2. sends collateral for all deposits from the cdp module to the liquidator module,
-// 3. moves debt coins from the cdp module to the liquidator module,
+// 2. sends collateral for all deposits from the cdp module to the liquidator module account
+// 3. Applies the liquidation penalty and mints the corresponding amount of debt coins in the cdp module
+// 3. moves debt coins from the cdp module to the liquidator module account,
 // 4. decrements the total amount of principal outstanding for that collateral type
-// (this is the equivalent of saying that fees are no longer accumulated by a cdp once it
-// gets liquidated)
+// (this is the equivalent of saying that fees are no longer accumulated by a cdp once it gets liquidated)
 func (k Keeper) SeizeCollateral(ctx sdk.Context, cdp types.CDP) sdk.Error {
 	// Calculate the previous collateral ratio
 	oldCollateralToDebtRatio := k.CalculateCollateralToDebtRatio(ctx, cdp.Collateral, cdp.Principal.Add(cdp.AccumulatedFees))
@@ -24,8 +24,6 @@ func (k Keeper) SeizeCollateral(ctx sdk.Context, cdp types.CDP) sdk.Error {
 	cdp.AccumulatedFees = cdp.AccumulatedFees.Add(fees)
 	cdp.FeesUpdated = ctx.BlockTime()
 
-	// TODO implement liquidation penalty
-
 	// Move debt coins from cdp to liquidator account
 	deposits := k.GetDeposits(ctx, cdp.ID)
 	debt := sdk.ZeroInt()
@@ -35,6 +33,7 @@ func (k Keeper) SeizeCollateral(ctx sdk.Context, cdp types.CDP) sdk.Error {
 	for _, dc := range cdp.AccumulatedFees {
 		debt = debt.Add(dc.Amount)
 	}
+
 	debtCoin := sdk.NewCoin(k.GetDebtDenom(ctx), debt)
 	err := k.supplyKeeper.SendCoinsFromModuleToModule(ctx, types.ModuleName, types.LiquidatorMacc, sdk.NewCoins(debtCoin))
 	if err != nil {
@@ -108,3 +107,10 @@ func (k Keeper) LiquidateCdps(ctx sdk.Context, marketID string, denom string, li
 	}
 	return nil
 }
+
+// ApplyLiquidationPenalty multiplies the input debt amount by the liquidation penalty and mints the debt coins in the cdp module account
+func (k Keeper) ApplyLiquidationPenalty(ctx sdk.Context, denom string, debt sdk.Int) sdk.Int {
+	penalty := k.getLiquidationPenalty(ctx, denom)
+	penaltyAmount := sdk.NewDecFromInt(debt).Mul(penalty).RoundInt()
+	return penaltyAmount
+}
diff --git a/x/cdp/keeper/seize_test.go b/x/cdp/keeper/seize_test.go
index 0c89db6b..e769826d 100644
--- a/x/cdp/keeper/seize_test.go
+++ b/x/cdp/keeper/seize_test.go
@@ -108,6 +108,9 @@ func (suite *SeizeTestSuite) TestSeizeCollateral() {
 	suite.NoError(err)
 	tpa := suite.keeper.GetTotalPrincipal(suite.ctx, "xrp", "usdx")
 	suite.Equal(tpb.Sub(tpa), p)
+	auctionKeeper := suite.app.GetAuctionKeeper()
+	_, found := auctionKeeper.GetAuction(suite.ctx, 0)
+	suite.True(found)
 	auctionMacc := sk.GetModuleAccount(suite.ctx, auction.ModuleName)
 	suite.Equal(cs(c("debt", p.Int64()), c("xrp", cl.Int64())), auctionMacc.GetCoins())
 	ak := suite.app.GetAccountKeeper()
@@ -162,6 +165,16 @@ func (suite *SeizeTestSuite) TestHandleNewDebt() {
 	suite.Equal(sdk.NewDec(tpb.Int64()).Mul(d("1.05")).TruncateInt().Int64(), tpa.Int64())
 }
 
+func (suite *SeizeTestSuite) TestApplyLiquidationPenalty() {
+	penalty := suite.keeper.ApplyLiquidationPenalty(suite.ctx, "xrp", i(1000))
+	suite.Equal(i(50), penalty)
+	penalty = suite.keeper.ApplyLiquidationPenalty(suite.ctx, "btc", i(1000))
+	suite.Equal(i(25), penalty)
+	penalty = suite.keeper.ApplyLiquidationPenalty(suite.ctx, "xrp", i(675760172))
+	suite.Equal(i(33788009), penalty)
+	suite.Panics(func() { suite.keeper.ApplyLiquidationPenalty(suite.ctx, "lol", i(1000)) })
+}
+
 func TestSeizeTestSuite(t *testing.T) {
 	suite.Run(t, new(SeizeTestSuite))
 }