6 Difference between Insolvency and Bankruptcy

Insolvency and bankruptcy are the two terms which is used when any person or firms is unable to settle the debts on time. Both these terms are very different from each other. Like insolvency is the stage when someone is unable to pay the debt which he/she landed from the other. While the bankruptcy is the final stage of the insolvency in which person or firm is legally declared that person or firm is unable to pay the debts.

Both the terms insolvency and the bankruptcy are used in the business or finance sector. Insolvency and bankruptcy are very important to understand if someone have loans or debts for the business. In this article we will discuss in detail about insolvency and the bankruptcy. Their main difference and other important aspects.

Insolvency vs bankruptcy

Sr. No.	Insolvency	Bankruptcy
1	Stage in which a person/firm is not able to pay his debts.	Legal Preceding in which person or firms declares that he is unable to pay debts.
2	Temporary in nature.	Permanent.
3	Not last resort	Last resort
4	Non-voluntary in nature.	Voluntary in nature.
5	By the selling of assets and negotiation debts insolvency can be reversed.	Bankruptcy is non – reversible.
6	Insolvency takes place for individual as well as firms.	Bankruptcy happened in individual case only

Insolvency

Insolvency is a state of economic distress. It is the initial stage of the bankruptcy. It is the stage when a person or first is not able to pay the loans or debts. When someone’s business not running properly and person is unable to Fulfils his basic needs in that case he lends money from banks and other sources this results to bankruptcy. Insolvency is arises when the cash in flow of a person or firm is less than the  cash out flow. In that case his income is not sufficient to fulfil even his basic needs and the liability. In big firms case total assets and the inflow of money is less the expenses.

Some reasons for insolvency

1. Fall in cash flow.
2. Poor business management.
3. Low sales.
4. Loss of contacts and customers.

Bankruptcy

Bankruptcy is the final stage of the insolvency in which legal proceedings are done. In this person or firm filled a petition himself in which he declares that he is not able to pay his debts. It’s up to court that account or decline the petition. In this case court solves person or firm’s debit by the bidding of property and assets.

Bankruptcy is the last stage of the insolvency a new lease is provided by the bank to the person or firm to start the new or fresh business.

Forms of bankruptcy

1. Reorganization Bankruptcy
2. Liquidation Bankruptcy

Main differencee between insolvency and bankruptcy

1. Insolvency is the stage in which a person/firm is not able to pay his debts. Bankruptcy is legal Preceding in which person or firms declares that he is unable to pay debts.
2. The nature of the insolvency is temporary in nature. Bankruptcy is permanent.
3. Bankruptcy is last resort but insolvency is not
4. Bankruptcy is voluntary in nature. While insolvency is non- voluntary.
5. By the selling of assets and negotiation debts insolvency can be reversed. Bankruptcy is non – reversible.
6. Bankruptcy happened in individual case only. While insolvency takes place for individual as well as firms.

Conclusion

Insolvency and bankruptcy are used when someone is unable to pay his debts on time. Both insolvency and bankruptcy is temporary and permanent in nature. Bankruptcy is self declaration that particular is not able to settle the debts.

This is all about the insolvency and bankruptcy. Hope you understand the topic very well. For more interesting topics like this please go through our website.