Bankruptcy and Insolvency: What’s the difference?

Many people mistakenly believe insolvency and bankruptcy to be the same thing. However, while there are similarities, they have different meanings.

What’s the difference between insolvency and liquidation?

Insolvency is a financial state where a company or individual is unable to pay their debts on time, while bankruptcy is the legal process when a person has been declared insolvent. An insolvency proceeding often occurs after less formal arrangements of improving the financial situation have failed. Insolvency proceedings can begin if the debtor company owes more than £750 and they are not disputing the debt. In some cases, insolvency can lead to bankruptcy if solutions are unable to address the current financial situation.

Cash-flow Insolvency

An individual or company becomes cash-flow insolvent when their assets are greater than their liabilities, but their liquid capital is insufficient to pay urgent debts. In other words, they own property worth more than their debt, but they don’t have the cash available to service that debt. This is usually a situation that can be resolved through negotiation, whereby a creditor may choose to wait for assets to be sold instead of taking further action.

Balance-sheet Insolvency

The alternative is balance-sheet insolvency. This is when the debts outstanding are greater than the total value of assets owned. A balance-sheet insolvency is not necessarily terminal, as the individual may still have sufficient cash flow to keep paying their bills. However, they will only be able to pay a bill legally if it’s to the ultimate benefit of all their creditors. If the insolvent individual cannot do this, they may become bankrupt.

Insolvency Vs Bankruptcy

Bankruptcy is a type of insolvency usually applied to an individual. It’s not a term that’s applicable to a partnership or limited company in its legal sense, however, it’s often used loosely to define any type of financial failure.

It’s a form of personal insolvency, more extreme than individual voluntary arrangements, debt relief orders, or debt management plans, all of which assume that an individual is in a position to pay back at least some of the money owed. Bankruptcy generally means there’s no chance of creditors getting anything back. Usually, it’s a state that’s declared by the court because either the individual’s assets are worth less than their liabilities or they’re unable to meet their debts.

Creditor’s and Debtor’s Petitions

A creditor can petition for an individual to be declared bankrupt when they owe more than £5,000 without any kind of payment arrangement is in place. The petition can take one to two months to complete.

The process is much quicker when an individual declares themselves bankrupt, but it costs money, about £680. However, it will stop creditors from taking any further action. This is a debtor’s petition.

Advantages of Bankruptcy

Bankruptcy as a state usually lasts about a year, during which time any money the bankrupt individual makes may be taken to service outstanding debts. They may also lose valuable possessions and, in some circumstances, their profession.

There is a positive though: if you’re declared bankrupt, it’ll take the pressure off. You won’t have to deal with your creditors and you’ll be able to keep some personal property as well as general living expenses. At the end of the bankruptcy period, any outstanding debts are discharged and you’ll be able to start afresh.

At Irwin Insolvency, our fully trained staff are experts in dealing with bankruptcy and liquidation and recommending the best option for you. If your financial situation is giving you cause for concern, get in touch with us today.