Insolvency and bankruptcy are two closely represented concepts. These two terms are related but are two different concepts. They have some common expressions but they imply two different states. To understand these terms, all we can say is; All the bankrupts are insolvent, but not all the insolvent are bankrupts.
Insolvency is a financial state of being. It is a state where an individual or organization is not able to pay for its obligations. Insolvency represents any form of inability to pay for the obligation. Insolvency can be a state when there is;
- Cash flow crisis
- Loss of business profile or contracts
- Decrease or fall in sales
- Continuous loss in business
- Loss of customers
- Poor credit profile
Bankruptcy is a legal proceeding through which individuals or sole entities, who are not able to pay their debts, can seek financial relief. There are two forms of bankruptcy:
- Reorganization Bankruptcy: It is a legal proceeding where insolvent individuals or entities try to restructure all its obligations in such a way they meet them all.
- Liquidation Bankruptcy: t is a legal proceeding where insolvent individuals or entities try to fulfill its obligation by winding up business and selling all its assets.
Differences between Insolvency and Bankruptcy
|Meaning||Bankruptcy is a legal concept where court declares an individual or an entity bankrupt and provides a legal guidance to fulfill their obligation.||Insolvency is a financial state when an individual or entities are unable to clear their dues or debts.|
|State||It occurs in the last state.||It is just a financial or economic state and is temporary in nature.|
|Nature||This is the last stage. Bankruptcy announcement means selling or assets to pay back the debt.||This is a temporary state. There is a complete chance of bouncing back. The negligent form of insolvency is bankruptcy.|
|Occurrence||It occurs when you are in insolvency and do not attempt corrective actions.||It generally occurs when you do not have funds to pay off liabilities.|
|Application||Bankruptcy applies only to individuals or sole traders.||Insolvency applies to individuals as well as to business.|