What is the Difference Between Bankruptcy and Liquidation?

In times of economic distress, it’s imperative to have a clear understanding of what options are available to you.

Those may vary depending on individual circumstances, including whether it’s an individual or company that are no longer able to meet their financial obligations.

Terms like bankruptcy and liquidation are often bandied about without a clear distinction between the two.

You may be left wondering is bankruptcy the same as liquidation?

Is liquidation the same as bankruptcy?

While liquidation and bankruptcy are both legal processes to resolve debt, they are not the same.

What is the difference between bankruptcy and liquidation? Essentially, the difference lays in who has access to each of those processes.

In this article, we answer all your questions regarding does liquidation mean bankruptcy?

And consider under what circumstances you may opt for bankruptcy vs liquidation.

What are the key differences between liquidation and bankruptcy?

The main difference between liquidation and bankruptcy is that liquidation is a formal insolvency option available to limited companies whereas bankruptcy is a formal insolvency process available only to individuals.

In both cases, the assets of the legal entity (be it the individual or the limited company) are sold to raise funds to repay creditors.

The sale of assets in this context is often called liquidating assets, which may be where some of the confusion arises as to is bankruptcy and liquidation the same.

To be clear, liquidation refers to the sale of assets of a limited company followed by the winding up of that company, whereas bankruptcy refers to the sale of assets of an individual to repay debts owed to the creditors of an individual.

There are some key terms that differ in considering the formal processes of bankruptcy vs liquidation.

Both may be initially handled by an official receiver (part of the insolvency service and attached to the court) or may instigated by a licenced insolvency practitioner such as the professional team at Irwin Insolvency.

In the case of bankruptcy, the official receiver or insolvency practitioner is referred to as the ‘trustee’.

By contrast, for liquidation, they are known as the ‘liquidator’.

Bankruptcy vs liquidation

Bankruptcy occurs when an individual is unable to meet the financial commitments they have made.

In practical terms, an individual has more outgoings than incomings and does not have the means to repay their creditors.

They’re insolvent, and bankruptcy is one of several insolvency options available to the individual.

An insolvent person may file for bankruptcy themselves, thus starting a formal insolvency process.

Likewise, in certain circumstances a creditor may petition the courts to bankrupt their debtor.

It normally takes 12 months for a bankruptcy to be discharged, and remaining debt written off.

In bankruptcy, all non-essential assets are sold to repay creditors and to give the individual a fresh start financially.

The caveat to that is that credit rating and reputation may be impacted in the years following the bankruptcy being finalised.

So, what is the difference between liquidation and bankruptcy? Liquidation is when the assets of a limited company are sold to repay creditors, and the company is then wound up and struck off the register at Companies House.

That is, the company ceases to exist.

In most cases, liquidation occurs as a result of a company being insolvent, but not always.

There are three types of liquidation:

• Creditors’ voluntary liquidation (CVL)
• Members’ voluntary liquidation (MVL) and
• Compulsory liquidation

Both CVLs and compulsory liquidation occur when a company is insolvent.

By contrast, an MVL is a tax-efficient way for a solvent company to cease operations and disperse funds between creditors and shareholders of the company.

Professional advice to understand the implications of bankruptcy vs liquidation

Does liquidation mean bankruptcy? No, they are two separate insolvency processes.

Whether you’re facing the possibility of bankruptcy as an individual, or liquidation as a limited company, there are many factors to consider.

Both personal bankruptcy and liquidation of a company would be considered the final recourse when all other options have been considered and set aside.

There is a plethora of information available, not only bankruptcy vs liquidation, but also different insolvency solutions to consider.

It pays to trust your personal and professional reputation to experienced insolvency experts who can guide you on the best options tailored to your specific circumstances.

Bankruptcy can have long-lasting consequences, and the winding up of a company can have a massive impact on all involved.

Contact Irwin Insolvency today for the peace of mind knowing you have the most current and professional advice for your individual or business solvency.