Insolvency vs bankruptcy: What’s the difference?
The terms insolvency and bankruptcy are often confused. The more commonly known phrase, bankruptcy, is frequently misused to describe financial situations that it does not accurately represent. Whereas insolvency is a phrase that many people do not fully understand.
But they are two very different things with very different meanings and implications. Understanding the two and their key differences can help you navigate financial discussions and recognise the best practice actions to take if you are in financial difficulty, either personally or through your limited company.
Here, the experts at Bridge Newland explore in more detail, the difference between insolvency and bankruptcy.
What is bankruptcy?
Bankruptcy is a legal process that occurs when an individual cannot afford to pay their debts, such as their mortgage, car loan, or credit card debt. An individual can file for bankruptcy themselves, or a creditor can file to declare them bankrupt if they owe them more than £5,000.
Once the bankruptcy filing has been made, a court will declare the individual bankrupt, and they may be able to write off some or all of their debts or arrange a payment plan. However, bankruptcy can have serious long-term consequences, such as affecting your credit rating and ability to obtain credit in the future.
Bankruptcy only applies to individuals; a limited company or partnership cannot be declared bankrupt.
An example of bankruptcy is when an individual with a good job takes out a four-year car loan. The monthly repayment amount is more than manageable for them, but six months into the loan, they are made redundant and out of work for several months.
During this time, they can no longer afford to pay their car loan and the loan company is chasing for its money. In this scenario, the individual has become insolvent and can file for the insolvency process called bankruptcy.
What is insolvency?
Insolvency is a financial situation in which a company or individual can no longer pay its debts. Although it most commonly refers to businesses, individuals can also be insolvent. This situation may occur when there isn’t enough money to cover the debts that are owed.
A business may become insolvent if its cash flow doesn’t allow it to settle its debts and it has no liquid assets it can sell quickly to pay the debt. Another way a business can go into insolvency is if its debts are greater than the value of everything it owns, both cash and assets. This leaves the business unable to balance its finances, meet its financial commitments and settle its debts. Businesses can become insolvent for one or both of these reasons.
If your business is experiencing financial difficulty, the earlier you seek help, the more opportunities will be available to mitigate insolvency and achieve business recovery.
Insolvency can happen quickly and is often the result of something out of a business’s control. An example of insolvency is when a limited company unexpectedly loses one of its biggest contracts. This sudden revenue loss can significantly impact the business’s cash flow, which can mean that the business can no longer afford to pay its suppliers, bills, or wages. Falling behind on debts can also put the business in a state of insolvency.
Key differences between insolvency and bankruptcy
When looking at the difference between insolvency and bankruptcy, the main factors that set them apart include:
- Bankruptcy only applies to individuals or sole traders with unlimited liability, but insolvency can apply to individuals and companies
- Bankruptcy is a legal order, but insolvency is a state of financial difficulty
- Bankruptcy is a process and not a term to explain a person’s or company’s financial status so Bankruptcy is a type of insolvency, but insolvency isn’t a type of bankruptcy
- Although a type of insolvency, bankruptcy isn’t the only way out of insolvency
- Insolvency can occur without legal proceedings, but bankruptcy has to be legally declared at court
- Insolvency may be resolved through negotiations or financial management
Are you facing insolvency or bankruptcy? Get in touch with Bridge Newland
As a family-owned and fully licensed insolvency firm, we pride ourselves on maintaining the highest standards of professionalism. At Bridge Newland, our team is made up of highly skilled and experienced experts who adhere strictly to current insolvency laws and best practices. You can count on us for reliable and trustworthy insolvency guidance.
Our experienced insolvency practitioners are ready to support you through every phase of your financial journey. From providing debt advice to handling company liquidation and administration, as well as guiding you through CVAs, we offer affordable solutions tailored to help you overcome financial difficulties.
Reach out to our knowledgeable insolvency practitioners today for a complimentary and confidential initial consultation. Contact us today.
Categorised in: Latest Insolvency News
