Insolvency vs Bankruptcy

Insolvency--vs-Bankruptcy

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Differences Between Insolvency and Bankruptcy

Insolvency can be defined as a circumstance when the assets of an individual or a business organization are insufficient in comparison to the liabilities owned by the same. On the other hand, Bankruptcy is a legal way of handling insolvency, wherein an insolvent individual or business organization can take help from the government for settling off his dues lying with the creditors.

Insolvency vs Bankruptcy Infographics

Insolvency vs Bankruptcy info

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Key Differences Insolvency vs Bankruptcy

Comparison of Table

Basis of Comparison Insolvency Bankruptcy
DefinitionThis is a disturbance in the financial wellbeing of an individual or a business organization. It takes place when an individual or an entity is incapable of meeting the underlying financial debt obligations.This can be defined as the legal status of an individual or an entity that is unable to repay the financial debts it owes to the creditors, suppliers, and vendors.
Types

Corporate insolvency can be of three types-

1) Voluntary administration- in this type of insolvency, the directors of an insolvent business organization appoint a voluntary administrator to investigate the affairs of the same.

2) Winding up or liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more– It is the winding up of a company by selling all the remaining assets of an entity and distributing the net proceeds amongst the creditors. In case there is any surplus, then the same is distributed to the equity holders.

3) Receivership- It is a type of insolvency where the secured creditors of a company appoint a receiver for selling the remaining assets of the same and repaying their pending amounts.

Bankruptcy can be of two types-

1) Reorganization bankruptcy- In this type of bankruptcy, restructuring of repayment plans is done.

2) Liquidation bankruptcy- In this type of bankruptcy, the debtors choose to sell off their assets for paying the debts of the creditors.

Financial StateIt is a financial state.This is not a financial state.
LegalityIt does not reflect the legal status of an individual or a business organization.This reflects the legal status of an individual or a company. It is a legal procedure used for helping insolvent individuals or business organizations.
How to Resolve?It can be resolved through bankruptcy and various other mechanisms.It can be resolved by either winding up or taking the help from the government for settling their pending dues to the creditors.
Impact on Credit RatingsIt does not have any impact on the credit ratings of an individual or a business organization.It does have a possible impact on credit ratings of an individual or a business organization.
BehaviourThis is not permanent in nature, i.e. it’s a temporary state.It is permanent in nature.
ProcessThe insolvency of an individual or a business organization is involuntary.The bankruptcy of an individual or a business organization can either be voluntary or involuntary.
IndicatorsThe indicators of insolvency of an individual or a business organization can be a rise in debts and liabilities, a drop in sales, liquidity ratios (current ratioCurrent RatioThe current ratio is a liquidity ratio that measures how efficiently a company can repay it' short-term loans within a year. Current ratio = current assets/current liabilities read more, quick ratio, etc.), being lesser than one, delay in payments, enhanced reliance on credit, etc.The indicators of bankruptcy are insolvency.
RelevanceIt is related to financial debt obligations.It is related to the lawful or legal concept.

Conclusion

Insolvency can be defined as the failure of a person or business organization in paying off their financial debt obligations as a result of insufficient funds and assets. In contrast, bankruptcy is a legal way of handling insolvency where an insolvent knocks the government for help concerning settling off all his dues and liabilities that the same owes to its creditors. Corporate insolvency is of three types- voluntary administration, winding up or liquidation and receivership whereas bankruptcy are of two types- reorganization bankruptcy vs liquidation bankruptcy.

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