Bankruptcy and insolvency are two of the most dreadful words for any person or business. Though the two terms are often used interchangeably, there is a lot of difference between the two. A business is termed as insolvent when the net liabilities are more than the net assists and is followed by bankruptcy. The company is also insolvent when it fails to pay its debts when they are in due. Bankruptcy is filed by a person or a business when they are unable to pay off the debts.
The term bankruptcy means a method of legal proceeding. When a person is in the state of a financial mess and fails to repay the debt, he can file for bankruptcy in the court. In countries United Kingdom, bankruptcy often applies to a person or partnership instead of a business. In these cases, a different legal term is used, known as the liquidation.
In general, cases when a person is unable to pay off his debts and is under threat, he may appeal for bankruptcy. The person files an application in court and the court thereafter decides to reorganize his loans or to liquidate his assets so as to settle his debts.
Insolvency is somewhat similar to bankruptcy stating that the business or the person is unable to meet his debts. However, it should be kept in mind that this is not a legal term and is therefore used just to describe the condition of the business. When the income of the business stocks down and the liabilities cannot be fulfilled, then that business is said to be in the stage of insolvency. However, there are ways to come out of the stage of insolvency.
Therefore, bankruptcy is termed as the extreme stage of insolvency, when there is no other way out of the incurred loss and debt, the business applies for bankruptcy. Insolvency is, as said earlier, only a financial term, whereas bankruptcy is legal. There are various reasons for a business filing for bankruptcy such as poor management of the business, the poor state of income, recession, and natural disasters, etc. However, it is true that the business has clearly turned insolvent and cannot repay his debts on time so in that case, he has to file for bankruptcy.