Insolvency vs. Bankruptcy: What’s the Difference?

Were you aware that you can relieve yourself of debt no matter what your situation looks like?

We ask this because many people have heard of insolvency and bankruptcy, but few know what the difference between them is. By learning about insolvency vs bankruptcy, you can better prepare yourself to face debt without having to stress.

To save you some time, we’ll go over what insolvency and bankruptcy are so you can determine which route is best for you. Not only will it be easier for you to handle debt, but you’ll also avoid legal trouble.

Read on to learn everything you need to know about insolvency vs bankruptcy!

What Is Financial Insolvency?

Many people have the misconception that insolvency is a process, but it’s a state of being. When someone is financially insolvent, it means they’re unable to pay their debts.

People can become insolvent for a variety of reasons, but it often happens when they don’t earn as much money as they need for both personal needs and debts.

Businesses also face financial insolvency when they have poor cash flow. However, they have more options to deal with debts whereas individuals can only go through a few processes.

What Is Bankruptcy?

Whenever an individual or business is struggling to pay debts, they can go through a process known as bankruptcy. Filing for bankruptcy requires being in the state of financial insolvency.

When working with an insolvency service like the one at, one can start working toward paying their debts by deciding which process is best for them.

Bankruptcy often involves restructuring a payment plan or selling all of one’s assets to pay the debt. However, several types of bankruptcy exist that can be used by both businesses and individuals, though some apply only to certain things.

Types of Bankruptcy

Before filing for bankruptcy, it’s best to determine whether it’s necessary. In many cases, all you must do is figure out how to improve your cash flow. However, if you’ve reached financial insolvency because you have something like a failing business, then it may be best to file.

Here are some of the most common types of bankruptcy:

Chapter 7: Liquidation

When filing for bankruptcy as an individual, many financial insolvency services will recommend filing a Chapter 7. This type of bankruptcy revolves around liquidation, which is the act of selling assets to repay debt.

Chapter 7 bankruptcies are overseen by a court, so they’ll determine which assets should be sold to recover owed money. However, they can allow an individual to keep certain things, such as basic necessities and retirement accounts. Keep in mind, though, that nothing is guaranteed when filing for a Chapter 7 bankruptcy.

Chapter 11: Reorganization

When a business files for bankruptcy, they often go with Chapter 11. A Chapter 11 bankruptcy is designed to allow a larger company to reorganize its business to improve cash flow.

In many cases, this involves getting rid of employees and changing the way their services are offered. It’s up to the company to decide how it’ll reorganize itself, then they’ll present their idea to a court.

A Chapter 11 bankruptcy can give a business extra time to figure out how they’ll resolve their debts without facing legal trouble for not paying them.

Some individuals can also go with a Chapter 11 bankruptcy if they have too much debt to qualify for a Chapter 13 bankruptcy.

Chapter 13: Repayment Plan

Similar to a Chapter 11 bankruptcy, a Chapter 13 bankruptcy revolves around restructuring. However, instead of reorganizing a business, a Chapter 13 bankruptcy is for coming up with a new repayment plan.

This is a popular type of bankruptcy because it allows both individuals and businesses to keep their assets. The amount they’ll start paying will vary depending on their income and how much they owe.

Like mentioned, if someone owes too much money, it’ll be hard to convince a court that you can handle a Chapter 13 bankruptcy. According to the law, one can owe no more than $1,257,850 to be eligible for a Chapter 13.

How to File Bankruptcy

Meeting with an attorney will also help you figure out which type of bankruptcy is best for you. If you decide to work with a financial insolvency service, they may have a team of lawyers that can help you.

Filing bankruptcy is a simple process that starts with hiring an attorney. They can gather all the documents you need to properly file without running into problems later.

Throughout the process, you may meet with a court several times to discuss the terms of the bankruptcy. When working with a lawyer, they’ll let you know which things you can keep so you know what to expect.

Providing that everything goes well, you can start repaying debts in no time without having to worry about hefty fees. A lawyer or insolvency service can also ensure that you correctly file taxes to avoid more trouble.

Now You Know the Difference Between Insolvency vs Bankruptcy

As you can see, understanding what insolvency vs bankruptcy is doesn’t take much. Now that you’ve read this article, you’ll be ready to deal with financial insolvency if you ever reach that point.

If you’re already insolvent, we encourage you to seek a lawyer as soon as possible to start the bankruptcy process. They can also let you know of alternate options so you don’t force yourself to file for bankruptcy if it isn’t necessary.

To learn more about bankruptcy and other topics, check out the rest of our articles!

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