Bankruptcy and insolvency

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Bankruptcy

An individual/company is unable to pay off its outstanding debts and files an application with a court to get himself declared as an insolvent or the creditor can file an application in the court against the insolvent.

Bankruptcy is when an individual’s assets are sold and the monies collected are distributed to the creditors.

Now, the court may decide the appropriation of the personal property of the insolvent among his various creditors.

It is the last stage of insolvency and gives a new lease to the insolvent to start a fresh, i.e. it relieves the individual or a company from all the debts and other disadvantages of insolvency.

Insolvency

Insolvency is a situation which arises due to the inability to pay off the outstanding debts on time to the creditors because the assets are not enough to cover up the liabilities.

In case of a company, this condition is caused due to the continuous fall in sales and it doesn’t have enough cash to meet out its day to day expenses of the business, for which it takes loans from the creditors or banks or any other financial institution.

This results in insolvency of the company in the form of liquidation, voluntary administration.

Key Differences Between Bankruptcy and Insolvency

  • The Bankruptcy refers to a legal state in which an individual / company becomes bankrupt, whereas the Insolvency refers to a financial state where an individual / company becomes insolvent.

  • The major difference between them is, Bankruptcy is the last stage of insolvency.

  • The Insolvency may not necessarily leads to a bankruptcy, while all bankrupt individuals / companies are insolvent.

  • In Bankruptcy, the person / company goes to the court and voluntarily declares himself as an insolvent.

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