When it comes to understanding the legal term “insolvency,” there is a lot of confusion online about these terms. Some people use the words interchangeably, while others think that they have completely different meanings. So, what is the difference between insolvency and bankruptcy? And when do you need to file for one or the other? In this blog post, we will explore the differences between insolvency and bankruptcy and help you understand which one is right for you.
The definitions
First, let’s start with a definition of each term. Insolvency is when an individual or company is unable to pay their debts as they come due. This can happen for a variety of reasons, including job loss, large, unexpected bills, or overextending credit. On the other hand, bankruptcy is a legal process that allows an individual or company to restructure their debt and repay it over time. Bankruptcy can also provide some protection from creditors.
What are the differences?
Now that we have a basic understanding of each term, let’s look at the main differences between them. First, insolvency is not a legal process like bankruptcy. This means that there is no protection from creditors if you are insolvent. Second, when you are bankrupt, you are still responsible for repaying your debts. However, the bankruptcy process can help you restructure your debt and make it more manageable. Finally, insolvency can be caused by a variety of factors, but bankruptcy is usually caused by financial difficulties.
What’s the difference between cash flow insolvency and balance sheet insolvency?
Cash Flow Insolvency
When a person’s assets are greater than their liabilities, but their liquid capital is insufficient to pay urgent obligations, they become cash-flow insolvent. In other words, even though they own property worth more than their debt, they do not have enough money on hand to service it. This is generally an issue that may be resolved through negotiation, with a creditor choosing to wait for assets to sell rather than taking further action.
Balance Sheet Insolvency
This occurs when the total value of assets owned is less than the total amount of debt outstanding. A balance-sheet bankruptcy is not always fatal; in fact, the individual may still have enough cash flow to pay their obligations. However, if they are unable to do so, they will go bankrupt.
Your options
So, which one is right for you? If you are struggling to make ends meet and are facing creditor calls and collection notices, insolvency may be the best option for you. However, if you can repay your debts over time and just need some help getting started and a little more time, bankruptcy may be a better option. Either way, it’s important to speak with an experienced Insolvency Practitioner like Irwin Insolvency to discuss your specific situation and find the best solution for you.
Bankruptcy and insolvency are two very different things, with bankruptcy being the more severe of the two. If you are struggling to make ends meet, it is important to know the difference between these terms and what each one means for your financial future. Seeking advice from a qualified professional can help you determine if bankruptcy or insolvency is the best option for you.
