The Difference Between Insolvency and Bankruptcy

Although in business and economics the terms insolvency and bankruptcy are often grouped together, many people do not realize that they are different and separate financial states.

It is therefore important to understand these differences and how they affect a business or individual’s credit rating, withstanding debts and their income. Today we will cover here briefly the difference between insolvency and bankruptcy.

A state of insolvency on the other hand can be described in two ways. It happens because a business or individual has fewer assets than they do liabilities or they simply cannot pay their debts on time. If a debtor cannot find a solution to insolvency then they may eventually have to file for bankruptcy.

What is insolvency?

People are considered to be insolvent when they are unable to pay the debts they owe to lenders on time. If you become insolvent, you may choose to file for bankruptcy, or you could deal with your debts through other options such as a consumer proposal or debt consolidation.

What is bankruptcy?

Filing for bankruptcy is a legal process that allows a person facing overwhelming financial difficulties to clear their debts and start fresh.

Filing for bankruptcy is a process that involves many steps, including:

  • meeting with a Licensed Insolvency Trustee, or LIT (formerly known as a Trustee in Bankruptcy),
  • filing paperwork,
  • selling your assets if required,
  • contacting your creditors and meeting with them if requested,
  • attending credit counselling services, and
  • having your debts cleared, or discharged, buy the Federal Government’s Office of the Superintendent of Bankruptcy (OSB).

Someone who’s bankrupt is insolvent, but someone who’s insolvent isn’t necessarily bankrupt.

For example, my friend’s family member…I’m sure there are many attorneys who’d add up her assets and liabilities, see that she’s insolvent, and advise her to file for bankruptcy. Sometimes that’s the only way out of a bad financial situation. But she wouldn’t be bankrupt unless she filed a case in court.

What is Insolvency
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How Bankruptcy Has Changed Through The Years

It is important to note that both individuals and businesses can file for bankruptcy and both can become insolvent. In the past a large percentage of bankruptcies were involuntary, because an insolvent individual or business was forced to file for bankruptcy because they couldn’t pay their debts on time. However, nowadays most businesses and individuals choose to file for bankruptcy by themselves.

Some Important Considerations For Insolvent Companies and Individuals.

A company can cure the effects of insolvency by opening a line of credit, being purchased, selling assets or increasing their assets. The British company Ideal Corporate Solutions will be able to offer an insolvent company find a way out of its current situation.

Whereas an individual who is insolvent can cure this by finding some sort of part time work to increase their income, seeking credit counseling, settling their debts with or without outside help and proper sensible budgeting.

What Is The Automatic Stop?

When a business or individual file for bankruptcy they are protected by something called the automatic stop. This basically means that while they are bankrupt, their creditors are not allowed to attempt to collect payments. On the other hand though, insolvency does not come with the same level of protection and creditors are legally allowed to continue the collection of the debts. This could involve constant phone calls, visits to their work or home premises or even lawsuits.

What is Bankruptcy
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The Effects Of Insolvency and Bankruptcy Are Very Different

It is generally considered a negative thing to file for bankruptcy and this is reflected in the bankrupt individual or company’s credit rating. Bankruptcy does however allow a chance for the filer to have a fresh start. Compared to insolvency, which because the solvency of a company or individual can fluctuate often, if a company or individual experiences a period of temporary insolvency is not as negative to their credit rating. The downside is that insolvency can have an immediate impact on a debtor’s credit rating because of the amount of credit they have used or because they couldn’t pay their debts.

It is important to realize that insolvency is not the final coffin in a business or individuals livelihood and that there is help available to help avoid bankruptcy.

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