Bankruptcy and insolvency are related. Most people who find themselves in either state are able to address their finances in such a way that they eventually leave these situations behind them. This article will explain how bankruptcy and insolvency are different.

Chief Difference Between Bankruptcy and Insolvency

Bankruptcy is used to refer to a state that an individual is in, where they cannot repay their debts to their creditors and are seeking relief from all or some of those debts. Insolvency is similar but it is used for partnerships and limited companies. In fact, insolvency can be used to accurately describe all types of financial failure.

Types of Insolvency

With insolvency, a company or individual is unable to pay their debts when they become due. if two partners in a business are unable to pay the debts of the business, they could be described as insolvent but they could not jointly be described as bankrupt. If a public or private company has liabilities that exceed what they own, they are described as insolvent.

Liquidation is a particular type of insolvency that is used for limited companies or partnerships when they can no longer pay their debts. The company is brought to an end and its assets are redistributed. Administration and debt relief orders are other types of insolvency which are applied to businesses.

Personal Insolvency

Bankruptcy is not the only type of personal insolvency. Other kinds of personal insolvency include debt management plans and individual voluntary arrangements. Some people try to avoid bankruptcy and enter into a debt management plan.

A debt management plan doesn’t have the negative effect on their credit that bankruptcy does and they can often get back on a solid financial foundation more quickly. Bankruptcy involves legal proceedings and you can ask a lawyer who specializes in the area for help with the entire court process.