Banking Awareness: Insolvency VS. Bankruptcy

Banking Awareness is one of the most important topics to not only to score good marks in mains examination but also to sail through interviews. A banking aspirant is expected to know the basic banking and financial terms and questions in interviews are often asked from these basic terms. In this article, we will be discussing the term which you must have heard and used multiple times but would have hardly taken the pain to know the difference between the two. Insolvency vs Bankruptcy, what is the difference between the two and when they are used? We will be covering everything in this article.

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What is Insolvency 

When a person or an organization is unable to pay their debts when it becomes due and payable, Such a situation is termed as an insolvency. In other words, it can be said as when the liabilities exceed the total assets. It is mainly related to the financial state of that person or organization.

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It is a direct relationship between the person’s income/profit with the payment. For ex- whenever there will be a drop in sales, there will surely be a delay in payments & hence it can be identified that the Person/Organization might go to the state of insolvency but The state of insolvency can be managed by self, outside resources, and restructuring schemes.

Types of Insolvency

Insolvency depending on the factor is of two types:

  • Cash flow insolvency- It occurs when a debtor is not in a condition to repay the money.
  • Balance-sheet insolvency-It occurs when debts exceed assets.

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Bankruptcy word originally came from Italian Banca rotta meaning broken bench. The bench was a money dealer’s table so when the dealer goes out of the money the bench gets broken and from here came the word Bankrupt. It is a state when a person/organization is unable to pay their debts when they become due and payable and is also declared as bankrupt by the court, it is called bankruptcy. This state is also when the liabilities exceed the total assets or when you are unable to pay off your debts. This tells the financial status of a person or an organization but legally because of the involvement of the court.

Types of Bankruptcy

Depending on the declaration of the bankruptcy it is of two types:

  • Debtors Petition- When a person himself files declaring himself bankrupt
  • Sequestration order-When the court issues an order and declares a company or an individual bankrupt 

In this state a person/organization can also go to court seeking to be declared as bankrupt.

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Basically both these states are the inability of a person/organization to pay back the money. 

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