Difference between insolvency and bankruptcy

Difference between insolvency and bankruptcy

The insolvency it can be defined as a financial condition, in which a person or entity is unable to meet financial obligations as they are due for payment. Often confused with the term bankruptcy, but they are different. The failure a situation in which the court has declared the insolvency of a person or entity and issued orders for its resolution, that is, the ownership of the bankrupt eliminated, so as to pay the creditors.

In other words, the fundamental difference between insolvency and bankruptcy that the former refers to a state in which the debtor is unable to pay debts due to excessive liabilities on the assets, while the latter implies a legal scheme, in which the court it leads to insolvency and the bankrupt seeks relief.

Comparative chart

Basis for comparison Failure Insolvency
Sense A person / company is unable to pay off his outstanding debts and submits an application with a court to obtain himself declared as insolvent or the creditor may file an application against the insolvent court. A person / company not able to pay off its debts, denominated as cash insolvency or unable to offset its financial obligations due to the excess of liabilities with respect to the assets, called in case of insolvency of the financial statements.
Nature Permanent, resulting in the liquidation of the activities of an individual or entity. Temporary and amount can be recoverable.
Related to Legal concept Financial status
Last resort s No
Processes volunteer Involuntary
Credit evaluation Severely affected Not very influenced.

Insolvency definition

Insolvency is a situation that occurs due to the inability to pay off existing debts towards creditors in time because the assets are not sufficient to cover the liabilities.

In the case of a company, this condition is caused by the continuous drop in sales, and it does not have enough money to meet its daily business expenses, for which it takes loans from creditors or banks or any other financial institution. This results in the insolvency of the company in the form of liquidation, voluntary administration and controlled administration.

Definition of bankruptcy

Bankruptcy is a situation in which a person / organization sends a request to the competent court; in which he declares insolvent due to his inability to pay off debts and expenses, trying to be declared bankrupt. Now, the court can decide on the appropriation of the personal property of the insolvent among its various creditors. the last phase of insolvency and gives a new lease to the insolvent to start a new one, that is, relieves the individual or a company of all debts and other disadvantages of insolvency.

Key differences between insolvency and bankruptcy

The points presented explains the difference between insolvency and bankruptcy in detail:

  1. Bankruptcy refers to a legal status in which an individual / company becomes bankrupt, while Insolvency refers to a financial status in which an individual / company becomes insolvent.
  2. The bankruptcy caused by the inability to pay off outstanding debts while insolvency arises due to non-payment of financial obligations.
  3. Insolvency may not necessarily lead to bankruptcy, while all bankrupt people / companies are insolvent.
  4. In case of bankruptcy, the person / company goes to court and voluntarily declares himself insolvent.
  5. The bankruptcy initiated by the individual himself, in which the person / company goes to court and declares insolvent, therefore the voluntary process. On the other hand, involuntary insolvency.
  6. Bankruptcy is the final stage of insolvency, which results in the liquidation of an individual's or entity's assets. Conversely, Insolvency only for a particular period of time, until the company reaches a stage where it is ready to pay off outstanding debts.
  7. Bankruptcy severely affects an individual's credit score or entity while insolvency does not affect an individual's credit score.


  • It arises because of non-payment of debts.
  • Liabilities outweigh assets.


These two terms discussed above are closely related to each other, in that one leads to another, that is, where insolvency ends bankruptcy. But this does not mean that every individual / company that is insolvent is bankrupt, as the conditions can be temporary or resolvable without any legal intervention.