Difference Between Insolvency and Bankruptcy

Insolvency can be defined as a financial condition, where an individual or entity is unable to meet the financial obligations as they are due for payment. It is often confused with the term bankruptcy, but they are different. Bankruptcy is a situation when the court of law has declared the insolvency of a person or entity and passed orders for its resolution, i.e. the property of the bankrupt is disposed off, so as to pay creditors.

In other words, the fundamental difference between insolvency and bankruptcy is that the former refers to a state when the debtor is not able to pay the debts due to excessive liabilities over the assets, whereas the latter implies a legal scheme, wherein the court determines insolvency, and the bankrupt seeks relief.

Content: Insolvency Vs Bankruptcy

1. Comparison Chart
2. Definition
3. Key Differences
4. Similarities
5. Conclusion

Comparison Chart

Basis for Comparison	Bankruptcy	Insolvency
Meaning	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.	An individual/company is not able to pay off its debts, called as cash insolvency or not able to set off its financial obligations due to the excess of liabilities over assets, called as balance sheet insolvency.
Nature	Permanent, resulting in wind up of an individual or entity's assets.	Temporary and amount can be recoverable.
Related to	Legal Concept	Financial state
Last Resort	Yes	No
Process	Voluntary	Involuntary
Credit rating	Severely affected.	Not much affected.

Definition of 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 the 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 the insolvency of the company in the form of liquidation, voluntary administration, and receivership.

Definition of Bankruptcy

Bankruptcy is a situation in which an individual/organization sends an application to the relevant court; wherein he declares himself as insolvent due to his inability to pay off debts and expenses, seeking to be declared as a bankrupt. 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.

Similarities

• Arises due to the non-payment of debts.
• Liabilities exceed assets.

Conclusion

These two terms discussed above are very closely interrelated as one leads to another i.e. where insolvency ends the bankruptcy starts. But it doesn’t mean that every individual/company who is insolvent is bankrupt, as the conditions may be temporary or fixable without any legal interventions.