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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 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.


Dealing with a customer who won’t pay their bill

If you run your own business, chances are you will at some point encounter a non-paying customer.

To protect your business from getting into debt or running into other financial difficulties, it’s important to ensure you have a process in place to manage late payments.

When customers are late paying, it can feel a little awkward repeatedly asking them to pay up, but remember, you have provided them with a service and you are entitled to be paid for your work!

Of course, there could be a perfectly reasonable excuse for a late payment, so always approach the subject in a friendly manner and with an open mind.  Avoid going in all guns blazing, retaining a good relationship with your customers is important too.

The key to handling late payments is to be organised and professional with your approach.

Create a structured process to avoid late payments

  1. Communicate your payment terms clearly from the start

Discussing and agreeing on payment terms with customers early on can help to avoid problems later down the line.  Make sure that both parties have complete clarity over what costs are involved and when and how these costs should be paid.

  1. Put it down on paper

Get your payment terms down on paper or in a digital document and make sure all your clients have a copy to refer to.

  1. Make it legally binding

Include your payment terms alongside all your other terms of service in a legally binding contract, to protect your business and to deter late payments.


Dealing with late payments

Payments still going overdue? Here are some tips for chasing up late payments.

Be on the ball

Don’t let payments get really late before you start chasing.  If your client knows you will call as soon as the invoice goes overdue they’re more likely to try to pay on time to avoid the call.

Stay professional and don’t be apologetic

Don’t ruin your relationship with a customer over a late payment.  If possible keep things friendly, but don’t feel shy about being persistent.

Remember that you’ve provided your customer with a service and now they’re the ones not holding up their end of the bargain, you’re perfectly within your rights to chase up payment.

Pick up the phone and speak to the right person

It can be tempting to hide behind emails when the subject matter is a little awkward, but a telephone call is usually more effective.  When you do get through, if your usual contact isn’t the person who puts through payments, ask to speak to the relevant person or department. Relying on other people to pass the message on can delay things further.

Request a payment date

When chasing a payment don’t accept a vague response.  Ask for a date when you can expect to receive the payment by and advise that you’ll call back if there are any problems.

Setting out payment terms with clarity from the start and being organised with an efficient and professional process for chasing late payments can help to forge a smooth working relationship.