What is the difference between insolvency and bankruptcy?

The core difference between insolvency and bankruptcy is that bankruptcy is the term for a person a business that is unable to repay outstanding debts (insolvent) and claimed bankruptcy while insolvency is the state of being unable to pay the money owned in general.

Determined by a court of law, insolvency is not a synonym for bankruptcy. The difference between insolvency and bankruptcy is simple: bankruptcy is a type of insolvency. Bankruptcy can be voluntary bankruptcy or involuntary bankruptcy. The individual or an organization that is in bankruptcy will be given a court date and on that day it is needed for the responsible person to declare that the person is not able to pay off the debts. Finally, most of the debts will be forgiven, with a cost of 7 years of credit report on the person´s profile, note that for some special kinds of debts such as financial aid for college cannot be forgiven through bankruptcy[i].

Whereas, insolvency is when a legal entity cannot meet its financial obligation with its lenders or lenders as debts become due[ii]. There are two forms of insolvency: cash-flow insolvency applies when a legal entity can no longer meet their debt obligation on time and balance sheet insolvency (including accounting insolvency, which applies when total liabilities exceed total assets) applies when a legal entity´s liabilities exceeds their assets.[iii] Types of insolvency for individuals can be VAT´s debt relief orders, debt management plans and bankruptcy.

In United Kingdom, the modern insolvency law Companies Act 2006 (compared with the Cork Report of 1982), has been to attempt to rescue a company that is in difficulty, or to say company rescue, to minimise losses and to fairly distribute the burdens between the community, creditors, employees  and other shareholders that suffer from failure in business. With regard to banking, property, labour and conflict law are subjected to Numerous Acts such as Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the Insolvency Regulation (EC) 1346/2000, and case law. If the company cannot be saved it is ¨liquidated¨, so that the assets are sold off to repay creditors according to their priority. [iv]

For further information, please visit our insolvency practitioner ‘s website or send us an email to info@quabbala.com

[i] Business Dictionary

[ii] Investopedia

[iii] Bankruptcy24

[iv]  Report of the Review Committee on Insolvency Law and Practice (1982) Cmnd 8558