It can occur that the bank or any organization or even an individual goes out of money. In this case sometimes he cannot buy necessities for him and also it/he is not able to pay off the debts to its/his lenders.
Two terms are used for this condition of an individual or organization. These are
These terms are used interchangeably but in actual they are not synonymous. Let us see what are these terms:
- When a person/organization is unable to pay their debts when they become due and payable, it is called insolvency.
- So it can be said as when the liabilities exceed the total assets.
- It is related to the financial state of that person or organization.
- Identification: when there is a drop in sales, there are delay in payments, it can be identified that the person/organization might go to the state of insolvency.
- The state of insolvency can be managed by self, outside resources and restructuring schemes.
- Insolvency has two types: 1) Cash flow insolvency 2) Balance-sheet insolvency.
- Balance sheet insolvency occurs when debt exceeds assets. Cash flow insolvency occurs when a debtor is not in a condition to repay the money.
- The origin of the word Bankrupt came from Italian banca rotta meaning broken bench. The bench was a money dealer’s table. When the dealer goes out of the money the bench gets broken. Hence came the word Bankrupt.
- When a person/organization is unable to pay their debts when they become due and payable and is also declared as bankrupt by court, it is called bankruptcy.
- Bankruptcy can be issued in two ways: When a person himself files declaring himself bankrupt known as ‘Debtors Petition’.When the court issues an order and declares a company or an individual bankrupt known as Sequestration order.
- A person/organization can also go to court seeking to be declared as bankrupt.
- Like insolvency, it is also when the liabilities exceed the total assets or when you are unableto pay off your debts.
- It also tells the financial state, but is a legal concept because of the intervention of court.
- Bankruptcy cannot be resolved.
- All bankrupts will be called insolvent, but not vice-versa.