Difference Between Bankruptcy and Insolvency

It is common for people to confuse both terms; bankruptcy and insolvency. Therefore, the first thing to do is to clarify each of them before delving into the most important aspects of bankruptcy. When we speak of bankruptcy, we refer to the definitive closure of all the activities that were being carried out until the moment of cessation. From that moment, the debtor’s assets will be used to settle the existing debt with his creditors.

Speaking of Insolvency

Now, it is also possible to speak of insolvency when the situation is temporary and, if approved by a court, it will allow the renegotiation of pending payments while temporarily stopping the generation of interest. This allows a natural or legal person to renegotiate their debts with suppliers and gain time to clean up and improve their economic situation, and, in this way avoid bankruptcy.

In other words, when the situation is still reversible —entering bankruptcy, for example— and the company’s accounts can be improved, we speak of a situation of insolvency. However, if at that time it is already insurmountable, then that is when you have to talk about declaring bankruptcy.

Bankruptcy Features

  • This is the general insolvency of the company or natural person.
  • It must be a situation maintained over time.
  • It is possible to objectively check the bankruptcy situation.
  • The size of the debts is so great that it is impossible to deal with them in the current situation and context.

Declaring Bankruptcy

Why can it be good to declare bankruptcy? Although it may sound like something to avoid, it is better to declare bankruptcy if we know that we will not be able to face the debts. Mainly, there are four big advantages:

  • New interest is prevented from accumulating on existing debts.
  • Temporarily stops the asset seizure process.
  • The payment of debts is delayed, and it is possible to reach an agreement with suppliers and creditors to reduce the payment of the same.
  • It facilitates the process of renegotiating existing debts in the face of the possibility of not being able to collect them in the previous conditions as evidenced by the declaration of bankruptcy.

The Requirements

In the case of individuals, there are some requirements to meet when it comes to declaring bankruptcy:

  • In the last 10 years, there cannot be a final judgment against you with crimes related to the Treasury, Social Security, false documents, or against the rights of workers or assets.
  • The Public Administration, in any of its agencies, cannot be a creditor.

Preferred Option

As you can see, although it is not the preferred option for anyone, it is possible that declaring bankruptcy can bring relief to your financial situation. It will always be better to try to renegotiate and reduce debts when possible, but if that is not the case, bankruptcy will always be an alternative that deserves to be considered. You can contact a reputable law firm Columbia MD-based to learn more.