For those of you who are fortunate enough to never have experienced severe financial problems, bankruptcy and insolvency may appear as one and the same thing. There are however, differences between these two financial conditions, both in terms of the processes involved and the impact that they have on your future.
Should you encounter significant financial difficulty, understanding the difference between these options can help you aspire towards a brighter financial future. Remember, whatever dilemma you are undergoing there will be a solution that helps.
Bankruptcy and Insolvency: The Major Differences
With this in mind, what individual factors distinguish bankruptcy from insolvency as financial options? Consider the following: –
Purpose and Legality: While bankruptcy is a way of clearing unmanageable debts, insolvency simply refers to a situation where you are unable to make a repayment when it is requested. While the former is a time-consuming and often complex legal procedure, the latter is just a term used to describe any financial issues that you may have encountered. Insolvency can also be applied to business and commercial ventures, and refers to companies that have incurred unmanageable debt and been forced to cease trading.
The Options Available for Debtors: In terms of options and room for manoeuvre, insolvency offers debtors an opportunity to resolve their issues and move forward. Business owners can enter into an IVA (Individual Voluntary Arrangement), undertake a debt consolidation loan or establish a debt management plan, and each of these options offer a route towards long term solvency.
Bankruptcy is seen as a last resort for business owners and citizens, however, as it often means that they will be forced to sell off assets and suffer long term consequences.
The Long Term Impact of Bankruptcy and Insolvency: With this in mind, it is worth considering how bankruptcy impacts on claimants. To begin with, bankruptcy leaves a stain on your credit rating that lasts for 6 years, and this can have an adverse effect on future job and finance applications.
In extreme cases it can even cost afflicted individuals their home, as if it has equity this can be used by the court to pay off creditors. The nature of insolvency means that its long term consequences are far less challenging for debtors, especially for business owners whose venture has suffered due to austere economic conditions.
