It is a term often misunderstood. Sometimes it is used to indicate that someone is “broke” or “insolvent”. Although bankruptcy and insolvency are different terms, they can be used interchangeably. Insolvency refers to a situation where someone is unable or unable pay their bills. But bankruptcy does not always mean that you are bankrupt. Both terms have different meanings. For instance, bankruptcy is usually a term that applies to individuals. Insolvency however generally applies to businesses. Let’s examine the meaning of each term.
What is bankruptcy?
Bankruptcy is also known as Chapter 7 and 8. It is a legal proceeding. It is when an individual cannot pay their debts that bankruptcy is filed. You can choose to file for bankruptcy yourself, or a creditor can file to have you made bankrupt if you own them $5,000 or more at BKHQ. A court will declare that you are bankrupt. This will allow you to get relief from ALL or part of your debts.
Bankruptcy is one way for individuals to deal with debt, but it doesn’t apply to limited companies or partnerships. This allows an individual or company to avoid the burden of debt. Creditors are unable to demand payment, collect interest, or take legal action against them. Any assets that you do have will be put towards paying off your debts in a controlled way, but at the end of your bankruptcy period (which usually lasts about a year), any outstanding debt can be written off to give you a fresh start.
Here’s an example of bankruptcy
Joe works in the banking industry. Joe performs well at work and takes out a car loan. Joe loses his job when the bank fires many employees. Joe has struggled for over a decade to find work. As his bills mount, he has to take out an additional loan in order to pay the car. He borrows money from his credit card to cover emergencies but soon becomes too debt-ridden to repay all of it. With creditors calling him daily, he decides to file for bankruptcy.
Joe fills in an online form detailing his assets. The Insolvency Service receives the application. After carefully reading the application, an official receiver interviews him about his financial situation and whether he is considering bankruptcy.
The receiver will receive the application and take possession of Joe’s assets, including his vehicle. After that, he will begin to sell them. Joe’s details will be added to the Individual Insolvency Register. Joe’s bankruptcy information will also be kept on file for six years. Twelve months later Joe is exonerated. All outstanding debts forgiven
When is it the best time for you to file bankruptcy?
Although bankruptcy is a good way to reduce your debt, it’s not something you should do lightly. It can lead to a loss of assets and a negative effect on your life. You may also experience a drop in your credit score. It is possible that you will not be eligible for a mortgage after at least six months. After the bankruptcy proceedings are over, you won’t be eligible to become a director in a company.
Your personal situation may determine whether bankruptcy is the right option. If you are having trouble paying your debts, it is smart to seek professional advice. Unbiased advisors can give advice and suggest solutions for problems with debt that you may not know about. No fees are charged for the services of debt advisors.
What exactly is Insolvency?
Insolvency is also known for financial crisis. Insolvency refers the inability to repay your debts as due. Insolvent individuals can file for bankruptcy. Insolvency can be declared for either a business or an individual. This term is also used for businesses.
Two possible ways a company might go bankrupt include:
- Cashflow insolvency means that your company is without cash but has liquid assets.
- Insolvency on the Balance Sheet: Your company has more assets than it liabilities (liquid, illiquid).
Examples of insolvency
Insolvency is a common occurrence. These could be the first steps towards a slippery slope toward debt.
- Cash flow emergencies can be exemplified by:
- Loss of a business contract: Clients that were dependent upon you might suddenly change suppliers
- Loss of customers
Insolvency may also result from unaccounted for or unexpected expenses. Your company could be sued and you may have to pay significant damages. This could lead to severe financial losses if your company does not have adequate coverage.
What is the difference in bankruptcy and insolvency?
These are just a few examples that illustrate the differences between bankruptcy and insolvency.
- Insolvency is the term used to describe financial distress. A court may issue a bankruptcy order.
- There are many types and forms of insolvency.
- You have other options than bankruptcy to avoid insolvency.
- Bankruptcy does not apply to sole traders or people with unlimited liabilities. Both individuals as well as businesses can become insolvent.
What are the most effective preventative measures to avoid bankruptcy or insolvency?
Before your debt becomes overwhelming, you need to be alert and ready to intervene. Being aware of your finances, and keeping your books clean will help you keep your cash moving. Personal and business insurance can be purchased to protect you from income loss and lawsuits. Even the best-run business can go bankrupt if it has poor financial management. Even if you have a lot of assets and a large clientele, it is still possible to be insolvent. However, it doesn’t mean you are without money. Insolvency means you cannot pay your debts. Sometimes, you may have no choice but to sell your business assets in order to repay your debt. It is likely that you will not be able to trade if this is your only option.
A small business owner can get help from an accountant to manage finances and keep the balance sheets in order. Owning a business requires you to be focused on many aspects. You can make mistakes when you are under too much pressure and trying too hard. Entrusting your accounts to professionals can help reduce the risk of you falling into insolvency.
What can I do if my company is insolvent or bankrupt?
Professional accountants can help you if you are on the edge of bankruptcy or insolvency. It is likely that your company will have to make difficult decisions, which could prove draining. But this does not mean your venture has ended. An accountant can help find the right solution for your business. You could restructure your debts, re-finance your business or set up a voluntary arrangement.
Every year, thousands of people and companies experience this. There are many methods to overcome insolvency. If you have the right attitude, professional assistance, and the right mindset, you can overcome your insolvency. This will provide a solid foundation for your future growth.