Is insolvency the same as bankruptcy?
If you’re facing financial difficulties, you’ve probably become familiar with two terms: insolvency and bankruptcy. While these terms are closely linked, it’s important to know they have very different meanings and outcomes.
Each has its own set of legal processes, consequences and solutions. Understanding the difference between the two can help you make informed decisions, avoid unnecessary stress and take the right steps towards resolving your financial situation.
In this article, we’ll explain what insolvency really means, how it differs from bankruptcy, and what you need to know if you find yourself in either situation.
What is insolvency?
Insolvency is a term used when an individual or a company can no longer pay its debts. There are two types of insolvency:
- Cash flow insolvency: when you can’t pay your bills when they’re due
- Balance sheet insolvency: your liabilities are greater than your assets
It is a financial position rather than a legal process. Insolvency for individuals can lead to bankruptcy, and for businesses, it can lead to liquidation or administration.
What is bankruptcy?
Bankruptcy is a legal process that applies to individuals. It is a way of handling debts that you cannot afford to pay, but it is often seen as a last resort when other debt management strategies have failed. Individuals who owe more than £5,000 can file for bankruptcy through the courts.
Once an individual has been declared bankrupt, most of their debts will be written off, assets may be sold to repay creditors, and they’ll usually be discharged after 12 months with some restrictions.
How are insolvency and bankruptcy different?
Insolvency and bankruptcy are very different. Here are some of the ways they differ:
- Insolvency is a financial state that can affect individuals and businesses
- Bankruptcy is a legal process that only applies to individuals
- If you’re insolvent, you do not have to declare bankruptcy. There are other options, such as Individual Involuntary Arrangements (IVA) or Debt Relief Orders (DRO)
- Insolvent companies do not go bankrupt – they enter administration, liquidation or agree a Company Voluntary Arrangement (CVA)
- Bankruptcy must be declared through the courts.
- Insolvency can be determined by an accountant or adviser as well as company officers or the insolvent individual.
When should you seek advice?
As soon as you recognise financial difficulties, it’s advisable to seek advice sooner rather than later. While it can be easy to bury your head in the sand and ignore your problems, they will not go away and will only get worse without action.
Many people wait until the situation has become critical before acting. But the earlier you seek advice, the more options you’ll have available to you. Here are some warning signs that your financial situation may be deteriorating:
- Relying on credit cards to pay bills
- Falling behind on rent, mortgage or debt repayments
- You’re receiving final warning letters
- You don’t know which debts to prioritise
Are you looking for insolvency or bankruptcy advice?
If you’re concerned about your financial situation and would like some advice and guidance, then we would advise getting in touch with a team of professionals as soon as possible. With experienced Insolvency Practitioners on hand, Bridge Newland is here to help. Please contact us to discuss your specific circumstances.
Categorised in: Insolvency Reviews & Advice
