Is There a Difference Between Insolvency and Bankruptcy?

There is a mistaken belief that insolvency and bankruptcy mean the same thing. However, whilst the terms do have similarities, there are several distinct differences between the two. First and foremost, insolvency is the financial state of a company or an individual, whereas bankruptcy is the legal procedure when an individual has been declared insolvent. However, in reality it’s not this simple so, let’s take you through the difference between insolvency and bankruptcy.


What is insolvency?

Insolvency is when a company or an individual is unable to pay their debts when due. There are two states of insolvency – balance sheet insolvency and cash flow insolvency.


● Balance sheet insolvency – is when a company or individual’s debts are higher than the total value of their owned assets. However, this does not necessarily mean they don’t have any cashflow.

● Cash Flow insolvency – is when a company or individual’s assets are higher than their liabilities but there is insufficient cash flow, or liquid capital, to pay debts when due.



Insolvency doesn’t necessarily mean liquidation but it does result in resolving the situation with creditors through a variety of options, such as voluntary arrangements. If the level of insolvency is irrecoverable on the part of the company, it will lead to liquidating the company; for an individual, it will mean declaring bankruptcy. Creditors are also entitled to apply to court to liquidate a company or declare an individual bankrupt if they are owed in excess of £750.


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Location: United Kingdom

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