Bankruptcy and insolvency are two words that are thrown about interchangeably in conversation. But in the realm of finance, both of these terms hold very different yet overlapping meanings. Understandably, all this has caused a great deal of confusion.

That’s why in this blog, we will be dispelling some of the confusion by discussing the main differences between bankruptcy and insolvency. We will also be covering the situations where each one applies in the UK.

What is Insolvency?

Insolvency occurs when an individual or a business’s liabilities surpass its assets. Insolvency is an umbrella term used to describe all types of financial failure.

A company or an individual is technically insolvent when they fail to pay debt when it is due. Under the insolvency law in the UK, there are many avenues available to insolvent individuals and firms.

To sum it all up, in order to be deemed insolvent, a person or a company need to meet at least one of the following requirements:

• A business or individual’s liabilities (what they owe) exceed the total value of their assets (what they own)
• A business or individual is unable to raise enough to pay back their debts as they fall due.

Different Types of Insolvency

Since insolvency is a generic term for many different subcategories, it is important to understand the different types of insolvency. There are two main branches of insolvency:

• Personal Insolvency – insolvency of an individual
• Corporate Insolvency – insolvency of a business

Bankruptcy is only one form of personal insolvency. Other forms of personal insolvency  include:

• Individual voluntary arrangement (IVA) – a formal solution often used as an alternative to bankruptcy
• Debt Relief Order (DRO) – Suitable for individuals who owe less than £30,000

There are many different types of corporate insolvency arrangements as well. Under the insolvency regimen, these apply only to companies:

• Liquidation – applies to limited companies and partnerships
• Administration – applies to limited companies and partnerships
• Company Voluntary Arrangement – applies only to limited companies

What is Bankruptcy?

Bankruptcy is a specific legal process involving a court’s declaration that an individual is insolvent and can no longer pay back their debts.

An individual must owe at least £5000 to be declared bankrupt. They can either be declared bankrupt upon the petition of the court, upon creditor’s petition, or their petition.

After the court orders that an individual is bankrupt, a civil servant called an Official Receiver is nominated to oversee the bankruptcy case.

If people comply with their Official Receiver and meet the rest of the conditions, their bankruptcy usually lasts for a year.

Declaring Bankruptcy

Individuals who are struggling financially can also apply to the court to make themselves bankrupt. This process, called a debtor’s petition, is relatively swift and only takes about a week or two.

Declaring bankruptcy costs £800 worth of court fees which you would have to submit with your application. As soon as you are declared bankrupt, your creditors will cease all contact with you. Until then, they may try to chase you or recover goods from you.

Learn more about declaring bankruptcy

Bankruptcy vs Insolvency

The main difference between bankruptcy and insolvency is that insolvency is a generic umbrella term for financial failure whereas bankruptcy is a specific legal procedure (one of many) available under insolvency law.

Bankruptcy only applies to an individual whereas insolvency can apply to an individual as well as a partnership or a limited company.

It is worth mentioning that the decision to declare bankruptcy can deeply impact your life and financial plans. Declaring bankruptcy is usually the last resort, there are plenty of other options available to those struggling with debt under the insolvency regimen.

Alternatives to bankruptcy include Individual Voluntary Arrangements, Debt Relief Orders, Sequestration (for Scotland), and Debt Management Plans.

Bankruptcy and Insolvency Help

These are difficult times. The last few months have been financially challenging for most people. If you are struggling with debt and need help with it, do not hesitate to reach out to us.

Money Advisor is committed to helping people get out of debt and manage their finances in a better manner. If you or your loved ones need debt relief or are struggling to pay debt, you can count on us.

We can help you get out of debt and regain control of your finances. Get in touch with our friendly and impartial specialists for debt help, relief and support.