Insolvency vs Bankruptcy – When does each one apply in the UK?
What is Insolvency?
Insolvency occurs when a company or individual’s liabilities exceed its assets. When the total amount owed cannot be raised in time to pay off debt when it’s due, a company is technically insolvent. The best way to think about insolvency is to see it as a state of being. Being insolvent is the umbrella term for all UK subcategories, and under insolvency law, there are a number of avenues available.
What is Bankruptcy?
Bankruptcy is a specific legal process when a court declares that an individual is insolvent and can no longer pay off their debts. The individual must owe a minimum of £5,000, and either upon the petition of the court or the individual’s own petition, the Court orders that the individual is bankrupt. A civil servant known as the Official Receiver is appointed to oversee their bankruptcy.
Similarities & Differences between Insolvency & Bankruptcy
Insolvency is an umbrella term, of which bankruptcy is one of the many options available under insolvency law. Bankruptcy is generally a last resort option, and certain steps can be taken to avoid this and to implement other insolvency options. Under insolvency law, the most common alternatives to bankruptcy are individual voluntary arrangements (IVAs), and debt relief orders (DROs).
Prevention over treatment
If you’re worried about becoming insolvent, the best course of action is to seek independent advice from rescue and recovery experts before it’s too late. Procedures can be put in place to ease cash flow and avoid insolvency, some of the most common being:
- Negotiating with creditors via an informal arrangement
- Sole trader voluntary arrangement
- Chasing up your debtors
- Selling assets
If you’d like help or advice, get in touch with us. We’re happy to talk to you over the phone or arrange a Skype meetup. Recognising when you’re in trouble is a key business skill and there are many ways to avoid bankruptcy.