Bankruptcy and Insolvency

 

BANKRUPTCY

  Bankruptcy refers to a legal state. Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by court order, often initiated by the debtor. It’s designed to help individuals and businesses eliminate all or part of their debt or to help them repay a portion of what they owe.

INSOLVENCY

  Insolvency refers to a situation. Insolvency is a state of financial distress in which a person or business is unable to pay its debts. If you’re insolvent you’re simply not in the state to pay off your debts. Insolvency in a company can arise from various situations that lead to poor cash flow. When faced with insolvency, a business or individual can contact creditors directly and restructure debts to pay them off.

FACTORS TO TAKE INTO ACCOUNT IN DETERMINING IF A BANKRUPTCY FILING IS IN ONE’S BEST INTEREST.

 These includes:

  • whether you can afford to pay back your debts
  • whether you can reach a resolution with your creditors outside of bankruptcy
  • the types of debt you have, and
  • your specific circumstances.
THE CONSEQUENCES OF BANKRUPTCY 
  • It can also affect others financially. 
  • It can hinder one’s ability to obtain unsecured credit.
  • It can make it difficult to get a mortgage
  • It leads to the loss of property.
DIFFERENCES BETWEEN BANKRUPTCY AND INSOLVENCY
  • One can be insolvent, that is, unable to pay debts when they’re due without being bankrupt. However, one can’t be bankrupt, undergoing the legal process that resolves debt with a court’s oversight, unless one proves insolvency. 
  • Insolvency is a state of economic distress that an organization may be able to work through, while bankruptcy leads to a court order, dictating how debts will be covered.
  •  Insolvency is the first step, where an organization can work to resolve its debt even though paying obligations off may be difficult. When those attempts fail, bankruptcy comes in as the next step, where a court has the ability to excuse some debt and rule on a payment plan to resolve the organization’s financial trouble for them.

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