What is the difference between insolvency and bankruptcy?
As a small-business owner, you will likely be doing everything you can to avoid the terms insolvency and bankruptcy. Unfortunately for some, dealing with these processes will become a reality at some point in their career.
With that in mind, the two terms are similar enough that it can be easy to get them confused. To make things a little easier if you find yourself in financial difficulty, let's take a look at the key differences between insolvency and bankruptcy.
Being insolvent means a business is unable to pay its debts as they become due and payable. In basic terms, the money coming in to your business simply isn't enough to cover the outgoing expenses you pay.
In some cases, when a business becomes insolvent it is only temporary. Your company may have had a particularly bad period of trading due to circumstances outside of your control, or perhaps a series of irregular expenses which have had a significant impact on your overall financial position.
The best course of action should you see early signs indicating financial trouble is to take action to remedy the situation. Things are unlikely to get better if you attempt to wait them out, so be proactive, and reach out for assistance from experts when you need it.
While insolvency is a situation that affects businesses, at an individual level if you are unable to pay your creditors you may consider declaring yourself bankrupt. The two terms have quite different meanings and applications, however at some point of the bankruptcy process you will either have declared yourself insolvent, or have a court convinced that you are incapable of meeting your debt obligations.
Declaring yourself bankrupt is a fairly drastic measure, one which has consequences you need to consider carefully before you proceed. Your name will be recorded on the National Personal Insolvency Index, a public record of all bankruptcy proceedings which can impact your credit rating in the future.
It's true that declaring bankruptcy means your creditors will no longer be able to claim any further outstanding debt from you, but the long-term implications can make getting your finances back in order quite difficult.
Again, it's important to realise that, should you find yourself in serious financial difficulty, there are organisations willing and able to help you. It may take a lot of hard work and careful consultation, but insolvency and bankruptcy aren't necessarily the death of your small business or your personal finances.