How Insolvency is different from Bankruptcy? | Insolvency vs Bankruptcy

Difference between Insolvency vs Bankruptcy.
Meaning of Bankruptcy.
Meaning of Insolvency.

What is insolvency?

An entity – individual, or a company becomes insolvent when they are unable to pay back their debts. When a person, a group, or an organization cannot repay lenders back on time, they’re called insolvent. It is either due to their cash flow, or due to balance sheet.

When their cash flow makes it impossible for them to pay debts, or when they don’t have financial liquidation on their balance sheets, they are unable to repay their creditors, and hence, become insolvent.

Insolvency is a state of being that might prompt an entity to file for bankruptcy.

What is bankruptcy?

This is a legal declaration of one’s inability to pay their debts. When bankruptcy is filed, one is obligated to pay off whatever is owed, with the government’s help.

There are two primary types of bankruptcies are – reorganization and liquidation bankruptcy.

Under reorganization, the debtors re-plan their payment structures to make paying off debts relatively easier.
Under liquidation, debtors have to sell off certain assets and make use of money to repay their debts.
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Main difference between the two -

Insolvency refers to a situation, whereas bankruptcy refers to a legal state.
If you’re insolvent you’re simply not in the state to pay off your debts.
Whereas, if you are declared bankrupt, then you have to pay off your debts by either selling off your assets, or by restructuring payment processes with governments’ help.
Insolvency is a state of being. Bankruptcy is the conclusion.
A bankrupt can become insolvent; but not all insolvencies lead to the declaration of bankruptcy.
While both the situations refer to the state of being unable to pay off debts, they are two contrasting scenarios. If untreated, insolvencies can lead to bankruptcies.

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