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Differences Between Insolvency and Bankruptcy

Insolvency vs Bankruptcy: Basic Differences Explained

Bankruptcy and insolvency are among those complex words that often get mixed up or used interchangeably. However, bankruptcy and insolvency are two different things and it is essential to understand the difference between the two to make an informed decision.

A bankrupt individual is considered insolvent, but an insolvent individual doesn’t equal a bankrupt one. The terms also have multiple applications. For instance, bankruptcy typically refers to individuals and insolvency to businesses.

Let’s have a closer look at both terms.

What Is Insolvency?

While bankruptcy and insolvency refer to excessive debts, being insolvent is a state leading to bankruptcy declaration if the situation doesn’t improve. Simply put, you are insolvent when you are unable to repay the lenders.

While declaring bankruptcy is one solution to becoming insolvent, it doesn’t necessarily lead to it. You can change your insolvency status using other options, based on your situation, like applying for a debt consolidation loan or making a consumer proposal.

There are two main types of insolvency:

Cash-Flow Insolvency

A company or individual enters cash-flow insolvency if their assets are more than their liabilities, but the liquid capital is not sufficient enough to repay the debts. This means you own a property that is worth more than your debts, but you don’t have enough cash to repay the debt.

Such a situation can easily be resolved with negotiation where the creditors might agree to wait until your assets are sold to get their payment instead of taking any legal action.

Balance-Sheet Insolvency

Balance-sheet insolvency is when your outstanding debt is higher than the overall worth of your assets. Again, this insolvency is also not necessarily terminal as individuals might have enough cash flow to continue making repayments to their creditors. If you are unable to do this, you might end up filing for bankruptcy.

What Is Bankruptcy?

Bankruptcy, on the other hand, is a proceeding that offers relief and protection to individuals who can’t repay their debts and have no means of doing so. When declaring bankruptcy, you will be assigned a licensed insolvency trustee responsible for liquidating all owned assets, investigating your financial situation, and getting in touch with creditors.

You would be obliged to comply with the requests of your Trustee. You would also need to share all your financial details with your trustee. While you are still allowed to work or even run a business, it comes with certain restrictions.

Bankruptcy in Australia lasts for three years and one day, and your name would be included in the public records.

The Differences Between Insolvency and Bankruptcy Simplified

Here are some of the main differences between insolvency and bankruptcy for further understanding:

  • Bankruptcy is a court order or a legal process, while insolvency is a distressed financial state.
  • Bankruptcy is not the only resolution for insolvency.
  • Bankruptcy is applicable to sole traders and individuals with restricted liability, while insolvency is applicable to both businesses and individuals.
  • Insolvency is a state of financial distress, while bankruptcy is the final resolution of insolvency that can’t be improved.

Here is a comparison chart:

Bankruptcy Advisory Centre - Compare Insolvency and Bankruptcy

 

Your Options With Insolvency vs Bankruptcy

Bankruptcy should be your last resort, which is why it is essential to go over your options with insolvency and avoid bankruptcy. According to the Bankruptcy Act 1966, there are four main options for insolvency and each comes with its own set of consequences:

  • Temporary Debt Protection (TDP): When you apply for this option, you only get 21 days of protection from getting pursued by creditors. You would need to get professional assistance and advice during these days to come up with the ideal action plan to improve your financial situation.
  • Personal Insolvency Agreements: These agreements are made between you and all the creditors you owe to determine a payment plan to either pay the lump sum or pay in instalment at a specified period of time.
  • Debt Agreements: These are binding agreements you make with your creditors to pay back the amount you can afford.
  • Bankruptcy: If all else fails, you can file for bankruptcy. The typical bankruptcy in Australia lasts for three years and one day and you would be released from most of your debts, but the bankruptcy will appear on your credit report for a few years, depending on your situation.

Declaring Bankruptcy: When Is The Right Time?

Bankruptcy provides immense relief from your debts but it shouldn’t be a decision that is taken lightly as it can have a major impact on your life. Declaring bankruptcy means you might lose your assets and it would impact your credit score for years to come.

Being bankrupt means you can’t apply for a mortgage and can’t become a director of a company until you are released from bankruptcy. Moreover, you also have to abide by certain obligations and restrictions.

It is crucial to consult a professional bankruptcy expert to determine whether or not bankruptcy is the right option for you. We recommend that you consult with a bankruptcy expert at the earliest possible time in order that you can weigh up your options – by waiting too long you may lose access to some of the alternatives to bankruptcy.

Wrapping Up

Bankruptcy and insolvency both denote the lack of finances and ability to pay your debts. However, insolvency is not the last resort, unlike bankruptcy, and you can improve your financial situation.

If you have become insolvent or are on the brink of becoming bankrupt, you need to get professional advice immediately. It is certainly a stressful time and the right guidance can certainly improve your situation and prevent you from going bankrupt.

There are multiple ways of dealing with insolvency based on your situation to avoid bankruptcy. Using the right professional bankruptcy assistance, you would be able to make an informed decision and come out of your financial problems. Get in touch with us for a free consultation

 

Reviews

  • As a Trustee in Bankruptcy, Ross Thomson is often required to think outside the box. As well as creative thinking, Ross brings compassion to the table.

    For Ross, it’s important to see the people behind the financial problem –not just numbers.

    Ross recently helped a bankrupt client who lives in a retirement village with her seriously ill husband.

    The unit she & her husband live in is not owned by them, but subject to a 20-year lease.

    The money to be repaid by the management was due only at sale, when the client finally left the retirement village.

    Sale of the unit was likely to take several years &, if he did sell the couple’s unit, Ross realised he would be effectively evicting them from their home, without resources or family to help them.

    Ross decided to contact the retirement village management & put a proposal to them that they prepay some of the moneys they would otherwise pay the client.

    The village management considered the proposal & have agreed to prepay some of the moneys otherwise due.

    The client is relieved that she will not be evicted & can now concentrate on helping her husband through his health issues.

    The moneys paid represented about 75% of what would have been available to creditors if they waited two years.

    It is a win for the client and for the creditors.

    Melinda
  • I made an appointment with Andrew after finding him on google. I was nervous and apprehensive about what to expect but he made the process of bankruptcy extremely uncomplicated and stress free, allowing myself the opportunity to get the fresh start I was so desperate for. Thank you Andrew I could not recommend you enough.

    Kristy
  • Making the decision to go bankrupt was not easy however once I had spoken to Andrew i felt all my anxiety disappear. Andrew does not judge you and he has an innate ability to put you at ease. He took care of the whole process for me again reducing the stress involved with completing paperwork.
    Thank you very much.

    Hayley Eastough
  • I will definitely recommend Andrew Bell to anyone contemplating bankruptcy. Don't wait! Andrew is there to help. With his knowledge, he can advise you of the best path to take and assist with the mind boggling paperwork.

    Best of all, he is there for you through your entire bankruptcy period. Get your life back, it's not as bad as you think. Thank you Andrew for lifting the burden and allowing me to move on.

    Karilyn Mahon
  • I saw Andrew for 'advice only' on possible bankruptcy due to a divorce. Left an hour later with the paperwork all done and feeling like a new person!

    Andrew was extremely welcoming and made me feel so comfortable with my decision to proceed immediately.

    This was the best investment I have ever made and cannot speak highly enough of Andrew. He doesn't just give excellent service his follow up afterwards is amazing. Thankyou Andrew you made my 'new' life so easy to achieve!

    Vicki Johnston
  • Andrew was very helpful in helping me through the bankruptcy process, as a single mother left with a massive debt from my ex and our previous marriage. I was struggling to keep my head above water on a week to week basis.

    Andrew made me feel at ease immediately and helped me every step of the way, he happily and professionally answered any and all questions I had before, during and after the process. Thanks so much for your help Andrew!

    Aisha Edmonds
  • Would highly recommend Andrew to anyone having financial difficulties. Andrew made me feel very comfortable - he took care of everything and keep in regular contact with me throughout the whole process.

    Service was fantastic and he also keep in regular contact with me when everything had been finalised Thanks Andrew! can now get my life back on track.

    Cassandra Walsh
  • Very prompt service and excellent source of knowledge and information, I highly recommend Andrew's service for a quick turn around of circumstances.

    Eve Damjanovich
  • Andrew put my mind at ease in one easy appointment. Very satisfied with the outcome and service provided. Highly recommend Andrew.

    Tracey Douglas
  • Andrew was a steadying hand with his advice.Showing that things aren't as bad as first thought nor any obstacle insurmountable. If you have questions needing answers, Andrew is the person to ask. Thanks for your advice Andrew.

    Shane Thompson
  • Andrew was very knowledgeable, caring, helpful and compassionate when I went and saw him. He made me feel that I wasn’t the loser and failure that I thought I was being. Even down to the box of tissues on the table.. which I needed. Highly recommend to go see Andrew if your struggling. There is life after!

    Joanne Parker
  • Andrew and his team do an excellent job of helping their clients with bankruptcy advice and it is a pleasure to work with him.

    Gareth Lane
  • Don't hesitate contacting Andrew, I was stressed, struggled sleeping through debt. Andrew put me at ease. He listened to my situation and we decided on my next move. Andrew is professional and easy to talk too. I would recommend highly to anyone who wants help to give him a call. I appreciate your support Andrew. Regards Brett.

    Brett
  • Andrew has given me back my life!!! After living paycheck to paycheck, I didn’t know what to do. Until I made the big step and booked an appointment with Andrew. As soon as I left his office I felt a huge weight lifted!!!

    Deezy H
  • Andrew was prompt, organised, friendly and efficient with the processing of my documents and made everything very simple for me so I didn’t need to deal with the added pressure and stress. Thank you Andrew for allowing me to start afresh and getting it done within a matter of weeks.

    Kristy-lee

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