Differences between insolvency and bankruptcy

Insolvency refers to the inability of companies to pay their debts. On the other hand,
bankruptcy is a legal process that allows debtors to discharge their debts and resume
financial activity.

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Insolvency vs bankruptcy

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In simple terms, the final insolvency procedure is bankruptcy. If two cumulative conditions are met
- non-payment on the due date and lack of liquidity - then the company will
be insolvent. In contrast, bankruptcy is the legal procedure by which insolvency can be
resolved.

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What is insolvency?

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This occurs when a company is no longer able to pay its debts to
creditors, financial institutions, staff members or business partners. According to
current legislation, a company is considered insolvent after 60 days have
passed since the due date for creditor payments.

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There are two types of insolvency:

  - General - involves a judicial reorganisation and an attempt to restore the situation;
- Simplified - involves the debtor going bankrupt.

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What is bankruptcy?

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Essentially this is the last stage of insolvency proceedings and involves the liquidation of the debtor's assets
in order to cover the company's debts. If the assets do not cover
the debts, then they will be seized.

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There are two types of bankruptcy:

  - Reorganisation - occurs when debtors change their payment plan;
- Liquidation - occurs when debtors put assets up for sale to pay
their debts.

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Insolvency vs bankruptcy - Key differences

1. While bankruptcy is a permanent state and the last stage before the assets of an
   entity are sold to pay off debts, insolvency is an initial stage and temporary state
   of a company.
2. If bankruptcy is the final option, insolvency is not.
3. Insolvency is involuntary and occurs when cash inflows are less
   than outflows. Bankruptcy, on the other hand, is voluntary, which means that the debtor
   can declare it through a petition.
4. Bankruptcy is a result, while insolvency is a state of economic crisis.
   By following the procedures set out in the code, the insolvency situation can be resolved. With
   however, if the resolution mechanism fails, it is equivalent to
   a liquidation process (in the case of companies) or a bankruptcy process
   (in the case of individuals).
5. The insolvency process is specific to both individuals and businesses, but
   bankruptcy proceedings can only take place for individuals.

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What preventive measures can you take to avoid insolvency and bankruptcy?

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For many, bankruptcy and insolvency are the result of poor financial management,
including excessive debt accumulation, budgeting and overspending.

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To avoid getting into this situation, read our article on the characteristics of a successful
business. In it you'll find useful information about best practices to
prevent difficult financial situations.

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Also, for a practical solution, you can use Banqup, where you can
easily and securely manage financial documents such as tax returns,
invoices, receipts and contracts in one place.

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