What’s The Difference Between Bankruptcy & Insolvency?

September 2, 2022

When it comes to debt management, there are various options available to those experiencing financial difficulties and it can be beneficial to research and understand the nuances of each so you can determine which course of action is most appropriate for you.

What’s particularly important to understand is the difference between bankruptcy and insolvency. The term ‘bankrupt’ is often misused to imply being solvent, which can lead to confusion since the two terms are distinct and knowing the differences can help you see which route you need to go down.

Bankruptcy, for example, generally applies to individuals, a legal process that is undertaken when someone can’t afford to pay their debts. You can file for bankruptcy yourself or a creditor can do so to have you made bankrupt if you owe them over £5,000.

This is one way that an individual is able to settle their debts, but it isn’t available for limited companies or partnerships. Once you’ve been declared bankrupt, your creditors will no longer be able to demand payment, charge interest or proceed with further legal action.

The bankruptcy period typically lasts approximately a year, during which time any assets you have will be used to pay your debts back in a controlled way.,

As for insolvency, this is when you’re no longer able to pay your debts when they’re due. Both businesses and individuals can be insolvent, but it is typically used to refer to businesses.

It is possible to become insolvent if you don’t have enough cash accessible to pay your debts, but you do have liquid assets. You can also be insolvent if your debts are greater than your total assets.

The main differences between insolvency and bankruptcy:

–       Bankruptcy is a legal process

–       Bankruptcy only applies to individuals

–       Insolvency can apply to both businesses and individuals

–       Insolvency is a state of financial distress

–       Bankruptcy isn’t the only way to get out of insolvency

It’s advisable to understand what leads to both bankruptcy and insolvency alike, so you’re able to keep a lookout for warning signs and can take preventative action to stop your debts from piling up.

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