Difference Between Bankruptcy and Insolvency

Bankruptcy vs Insolvency

Bankruptcy and insolvency are related and are used interchangeably on many occasions. Bankruptcy and insolvency are conditions when a person or business is not able to pay their debts. The fact, however, is that they are not the same.

Insolvency is a situation where a person or a business is unable to pay its debts. Even if the person or the business has more wealth than they do debts, they are considered insolvent if that wealth cannot be quickly realized to settle the debt. There is a possibility that insolvency can lead to bankruptcy if the situation is not tackled. Insolvency does not mean bankruptcy is imminent; companies could be insolvent for some time until they pick up sufficient business to repay their debts.

Unlike insolvency, bankruptcy is a condition where a person or business is not able to pay their debts at all. Once a business reaches this stage, they file bankruptcy in the courts.

While bankruptcy is related to the courts, insolvency has to do with the accounts. In some countries, insolvency is applied to business establishments while bankruptcy is used of individuals. Generally the term bankruptcy is not applied to business establishments. A company that fails to meet its debts is considered to be facing liquidation rather than bankruptcy.

Insolvency comes in two forms ‘“ balance sheet insolvency and cash flow insolvency. A balance sheet insolvency happens when net assets are less than net liabilities. Cash flow insolvency occurs when a person or business is not able to settle their debts when due.

An insolvency will not affect an individual’s credit score as long as the debts are paid. On the other hand, bankruptcy will have a negative impact.

Summary

1. While bankruptcy is related to the courts, insolvency has to do with the accounts.
2. Insolvency will not affect a person’s credit score as long as their debts are repaid. On the other hand, bankruptcy will have negative impact on the credit score.
3. A business can have balance sheet insolvency; where net liabilities exceed net assets or cash flow insolvency; where there is insufficient cash to settle debts when due.

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