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What is the difference between Insolvency and Bankruptcy?

The Difference between Insolvency and Bankruptcy

Many people mistakenly believe insolvency and bankruptcy to be the same thing. However, while there are similarities, they have different meanings. Insolvency is a financial state where a company or individual is unable to pay their debts on time, while bankruptcy is the legal process when a person has been declared insolvent.

Cash-flow Insolvency

An individual or company becomes cash-flow insolvent when their assets are greater than their liabilities, but their liquid capital is insufficient to pay urgent debts. In other words, they own property worth more than their debt, but they don’t have the cash available to service that debt. This is usually a situation that can be resolved through negotiation, whereby a creditor may choose to wait for assets to be sold instead of taking further action.

Balance-sheet Insolvency

The alternative is balance-sheet insolvency. This is when the debts outstanding are greater than the total value of assets owned. A balance-sheet insolvency is not necessarily terminal, as the individual may still have sufficient cash flow to keep paying their bills. However, they will only be able to pay a bill legally if it’s to the ultimate benefit of all their creditors. If the insolvent individual cannot do this, they may become bankrupt.

Bankruptcy

Bankruptcy is a type of insolvency usually applied to an individual. It’s not a term that’s applicable to a partnership or limited company in its legal sense, however, it’s often used loosely to define any type of financial failure.

BANKRUPTCYIt’s a form of personal insolvency, more extreme than individual voluntary arrangements, debt relief orders, or debt management plans, all of which assume that an individual is in a position to pay back at least some of the money owed. Bankruptcy generally means there’s no chance of creditors getting anything back. Usually, it’s a state that’s declared by the court because either the individual’s assets are worth less than their liabilities or they’re unable to meet their debts.

Creditor’s and Debtor’s Petitions

A creditor can petition for an individual to be declared bankrupt when they owe more than £5,000 without any kind of payment arrangement in place. The petition can take one to two months to complete.

The process is much quicker when an individual declares themselves bankrupt, but it costs money, about £680. However, it will stop creditors from taking any further action. This is a debtor’s petition.

Advantages of Bankruptcy

Bankruptcy as a state usually lasts about a year, during which time any money the bankrupt individual makes may be taken to service outstanding debts. They may also lose valuable possessions and, in some circumstances, their profession.

There is a positive though: if you’re declared bankrupt, it’ll take the pressure off. You won’t have to deal with your creditors and you’ll be able to keep some personal property as well as general living expenses. At the end of the bankruptcy period, any outstanding debts are discharged and you’ll be able to start afresh.

At Irwin Insolvency, our fully trained staff are experts in dealing with bankruptcy and liquidation and recommending the best option for you. If your financial situation is giving you cause for concern, get in touch with us today.

 

5 Tips on Avoiding Bankruptcy

Bankruptcy is often a last resort for those in financial difficulty, but it’s never a good place to be. The good news is there are lots of things you can do to reduce the risk of going bankrupt. Whether you’re beginning to struggle financially or simply want more money to play with, here are five useful tips for avoiding bankruptcy.

  1. Budget Properly

This is something you should always do whether or not you’re in financial difficulties. Be organised and pay off any debts as quickly as possible. Do your accounts every month, and know exactly how much money you’re going to have and what you’ll be spending it on. Stick to your plans as far as you can and if possible build up a reserve. If you’ve got a mortgage, it’s good practice to have sufficient savings to cover three months of repayments in an emergency. If this isn’t possible, at least be clear on what’s coming in and going out at all times.

  1. Never Hide from the Truth

If things are getting bad, never ignore the problem, as this will only make matters worse. Don’t leave post unopened or ignore communications. There’s a great temptation to hide your head and hope it’ll all go away. Never do this. When things get difficult, seek help immediately. That way you’ll find options for reducing your problems that you may not have considered, and it’ll help to avoid the worst outcome.

  1. Maximise Your Income

Look at ways of bringing in more money. If you’re an individual with a cash-flow problem consider getting extra work. Even if you have a day job, there are often opportunities for a few part-time hours in a bar or cleaning at other times. If you have your own business, think about whether there are any other services you can offer to get you through the difficult patch. There’s no point trying to remain true to what you do when you need money. It doesn’t matter where it comes from.

  1. Cut Unnecessary Expenditure

Some things cost a lot more than you think when you see them on paper. Among the most common offenders are satellite television, holidays, subscriptions and cigarettes. These can take a high percentage of your monthly income, and when times are difficult they’re all things that, at a push, you can probably do without. If you’re running into debt, these are the things you should consider canceling. Focus your resources on the essentials.

  1. Know Your Assets and Liabilities

Divide everything you have into assets and liabilities. Assets are things that make you money such as the tools and clothes you use for work, the car that gets you there, savings accounts and similar. Liabilities lose you money whether they’re things you’ve bought that you don’t really need or things you have to spend money on to keep, such as subscription packages or club memberships. The game is to own as many assets as you can, whilst getting rid of liabilities wherever possible. So buy the former and sell the latter.

If you’re struggling financially and want advice on avoiding bankruptcy, contact Irwin Insolvency for friendly, professional advice from our empathetic team.