“Insolvency” and “bankruptcy” are two words people often mix up, thinking they are the same.
These two words are quite common in the financial world. Insolvency is a state where a person or organization is unable to take care of its debt.
In other words, it’s a situation where a person or entity’s liabilities have exceeded its assets and as such, unable to settle it’s debts when they become due.
Bankruptcy, on the other hand, is a legal declaration by the entity or person that it is unable to meet it’s debt obligations.
So, while insolvency is a financial situation, bankruptcy is a legal one.
Mr Akin, who owns an estates development company, decides to take a loan to expand his business if, after a certain time, he encounters financial distress and unable to meet the terms stipulated in his loan, then his business has become insolvent.
So, insolvency, as explained above only occurs when a person or entity cannot fulfil the terms of its loans when due.
An organization or entity facing insolvency can tackle it in a couple of ways, so that it does not lead to bankruptcy. Some of the corrective measures an entity can take against the situation includes: generating additional income, renegotiate the repayment plans with the creditors etc.
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If in the above case of Mr Akin, stated above, he is unable to prevent insolvency. Then he will have to file for bankruptcy. So, bankruptcy comes after an insolvency, and it is a legal process. When an entity file for bankruptcy, they generally get help from the government to settle their debts with their lenders.
A legal process is followed to declare bankrupt at a relevant court of law, after this, aid then can be gotten from the government to settle debts. A creditor can also file an application at a relevant court to declare an entity or person bankrupt.
Not all insolvent entities get to the bankruptcy stage, but all bankrupt entities have undergone insolvency.
Bankruptcy is only one of the ways insolvency can be solved. Sometimes an entity dealing with insolvency get declared bankrupt. But most often, the person or organization may just secure some legal immunity from its creditors for a period of time to allow them to settle their debt.
Most countries have their bankruptcy and insolvency act, which states that the complete legal conditions that regulate bankruptcy and insolvency-related matters. This act also ensures that bankruptcies declarations are not misused to manipulate or dupe creditors.
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