Current Affairs PDF

Insolvency VS. Bankruptcy

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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

insolvency_bank

These terms are used interchangeably but in actual they are not synonymous. Let us see what are these terms:

insolvency

  • 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.

bankruptcy

  • 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.