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Bankruptcy and insolvency are two of the most terrifying terms a person or company can hear. Despite the fact that the two names are frequently used interchangeably, there are significant differences between them.
When a company’s net obligations exceed its net assets, it is said to be insolvent, and bankruptcy is the result. When a firm fails to pay its debts when they are due, it is also insolvent. When a person or a business is unable to pay their debts, they file for bankruptcy.
The term “bankruptcy” refers to a legal procedure. When a person is in financial distress and is unable to repay his debts, he may apply for bankruptcy in court. In India, bankruptcy frequently refers to a person or partnership rather than a company. In these situations, a different legal word called liquidation is utilized.
In general, if a person is unable to pay his bills and his financial stability is jeopardized, he may file for bankruptcy. The person makes a court application, and the court decides whether to restructure his loans or liquidate his assets to pay off his debts.
Insolvency is comparable to bankruptcy in that it indicates that a company or individual is unable to pay its debts. It should be noted, however, that this is not a legal phrase and is only used to describe the state of the firm. When a company’s income declines and its liabilities cannot be met, the company is said to be insolvent. However, there are options for getting out of insolvency.
As a result, bankruptcy is referred to as the most extreme stage of insolvency, in which a business applies for bankruptcy since there is no other way out of the incurred loss and debt. As previously stated, insolvency is a financial term, but bankruptcy is a legal term.
A firm may file for bankruptcy for a variety of reasons, including bad management, low income, recession, and natural calamities, among others. However, if the business has plainly become insolvent and he is unable to repay his debts on time, he must file for bankruptcy.