The label Liberal Democrat doesn’t mean what it does in the United States. They are sort of like the Reform Party, ideologically between the Labor Party and the Tory Party.
The Lib Dems are merger of the old Liberal party (which was once good, I don’t know who I would have preferred in the 19th Century) which definitely wasn’t as bad as Labour, and the Social Democrats, a less marxist breakaway faction of Labour (I guess they were Blair New Labour Types, before Blair Labour was very far left back then).
On balance I’d say they are better than Labour, I’m sure there are some issues where they are worse (level of EU support for one).
A Tory/Ukip coalition would be the ideal result. I don’t know if that result is possible, I fear a lot of narrow plurality wins for Labour and not many UKIP seats. I am now wishing that instant-runoff voting had passed.
Lib dems may get wiped out, the old Liberals came back from oblivion once or twice but I’m not sure they would. Cameron would likely court their rump to merge with his Tories. UKIP could be the new third party with increasing Tory defections.