Did you know you can’t be bankrupt without being insolvent but can be insolvent without being bankrupt? The word “insolvency” has become a generic term for when a business cannot repay its debts. It can also mean when a company faces financial ruin. In either case, the result is the same – Insolvency. However, bankruptcy and Insolvency are very different, and having even the slightest knowledge of the two can help you make the right decision for your business.

While bankruptcy is the process of declaring personal Insolvency and seeking a personal discharge from creditors, Insolvency is reorganizing a business and its debts through a formal bankruptcy proceeding. You may think they are the same thing, but they are not. There are many similarities between the two processes, but some key differences should also be noted. In this article, we look at the key differences you should know. 

Bankruptcy and insolvency difference

What is bankruptcy?

Bankruptcy is declaring personal Insolvency and seeking a personal discharge from creditors. This includes various legal procedures like the following: filing a petition, an examination of your income and assets, and any relief you may be entitled to. To qualify for bankruptcy, you must meet specific criteria set by law. Essentially, you need to prove that you cannot pay your debts. Learn more about bankruptcy through this website.

Reasons for going bankrupt

• Job loss
• Unexpected or high medical expenses
• Excess or poor use of credit cards
• Separation or divorce
• Income reduction
• Bad spending habits or bad budgeting 
• Foreclosure on homes
• High cost of utilities
• Student loans and
• Credit card debt

What is Insolvency?

Insolvency is reorganizing a business and its debts through a formal bankruptcy proceeding. It should be noted that those who are not bankrupt can also face Insolvency. This can happen if your company cannot repay its debts and is on the verge of financial ruin. You can find more information about these basics through this website.

 There are two types of Insolvency. They are;

• Cash flow insolvency

This type of Insolvency refers to when you can’t pay a debt due to a lack of money. Cash flow insolvency may affect both individuals and businesses. It usually occurs when all other ways of resolving a debt payment have been exhausted. You can liquidate them and pay off your debts when you have assets. However, when these things run out, and there’s nothing more to liquidate, you can negotiate a payment plan with your creditors. 

To decide what to do with this type of Insolvency, you need to take a cash-flow test. This lets you know if your assets are enough to repay your debts. If it’s not, you can decide to file for bankruptcy protection. Read through Lawrina to know when you’re exempted from bankruptcy if you live in this state.

• Balance sheet insolvency

This is common for businesses where they use a balance sheet insolvency to determine whether they should file for bankruptcy or take steps to stay afloat. The company evaluates its outflows and inflows, and if the outflows exceed inflows, it might conclude that filing for bankruptcy is the way to go. 

Interestingly, a business can be balance sheet solvent and cash-flow insolvent ( when liabilities are less than non-liquid assets). The reverse of this is also possible. A company can be cash-flow solvent and balance sheet insolvent ( more debts than assets). This occurs when its revenues can meet immediate financial obligations. Businesses that have long-term debts operate in this manner.

Reasons for Insolvency

• Lack of financial information
• Failure to separate personal and business accounts
• Lack of budgeting
• Defaulting payments
• Lack of financial information
• Failure to have a debt recovery in place
• Over-reliance on one customer
• competition

Key Differences between Bankruptcy and Insolvency

Bankruptcy is a personal process and can be filed by the person who owes the debt. Insolvency is a much more complicated process involving many different parties, such as creditors, debtors, and court officials. With bankruptcy, you seek to discharge your debts from your assets. If you file for Insolvency, you are not personally responsible for any of the debts incurred by the business. Insolvency can only be filed if no other options are available to pay off creditors.

Bankruptcy is an involuntary proceeding, and filing for Insolvency is voluntary on behalf of the company’s management. With bankruptcy, there is no chance of saving your business – it will be liquidated to repay those creditors who have lent money to your company. With Insolvency, there may be a chance of saving your company if it successfully obtains protection from its creditors through this process.

Bankruptcy will result in public notice or advertisement, whereas Insolvency does not. Bankruptcies are governed by federal law, whereas insolvencies can vary from state to state and country, depending on local laws and regulations.

Summing up

Bankruptcy and Insolvency

Bankruptcy is a process of declaring personal Insolvency and seeking a personal discharge from creditors. On the other hand, Insolvency is the process of reorganizing a business and its debts through a formal bankruptcy proceeding. Bankruptcy is typically done by an individual who owes money to creditors, while Insolvency is generally done by a company that owes money to creditors. The threshold for bankruptcy generally ranges from $150,000 to $1 million in debt, but insolvent companies can be allowed to file for bankruptcy even if their debt exceeds $1 million.

Though both bankruptcy and Insolvency are reorganization processes, they are not the same thing. Bankruptcy is when individuals seek relief from their debts through an out-of-court settlement procedure. In contrast, Insolvency is when a company seeks relief from its debts through an out-of-court settlement procedure. Bankruptcies are public records, while insolvencies are not publicly available records. Lastly, there are different consequences associated with each term: one may lead to criminal liability while the other does not.

This is a Sponsored Feature.