Is Insolvency the same as Bankruptcy?
Whenever I get into a discussion about money with family and friends, we all seem to agree that the ability to get money, from a bank or a finance company, is rather easy. You fill in a few forms, show them you’re working in a steady job and within minutes, the account is full of readies to do whatever it is you wanted to do when you applied for the loan. Years ago, and I am talking about 2 generations, so let’s say 45 years ago, a bank manager would put you through hoops before he considered you for a loan.
I remember my grandad saying that when he went to get a loan of 30,000 for his first home, he felt like a beggar with the bank manager virtually challenging him to justify why his bank (yeah, HIS bank) should trust you. Can you imagine that today? The other thing is the stigma of bankruptcy on your record. In the 60’s and 70’s being declared bankrupt was akin to being labelled an axe murderer. Okay, I exaggerate to make a point, but do you get what I mean? So then what exactly is it that makes insolvency different?
While the terms insolvency and bankruptcy are often used interchangeably, they encompass distinct legal concepts. Insolvency refers to a financial state where a business is unable to meet its financial obligations, whereas bankruptcy is a legal process that may follow insolvency, involving a court declaration and the appointment of a trustee to oversee the distribution of assets to creditors.
When a business faces insolvency, it typically explores various options before resorting to formal bankruptcy proceedings. One common method is through voluntary liquidation, wherein the company, recognizing its financial distress, takes the initiative to wind up its operations. In this process, the company’s assets are sold, and the proceeds are used to settle outstanding debts to the best extent possible. This lets people still have control over their personal assets and they don’t have to necessarily file for bankruptcy. It’s a modern workaround for an old business problem.
But since laypeople are still unaware of this difference, you find the older generation always wanting to deal in cash. They don’t like to purchase stuff online and they would always pay cash at the supermarket for their shopping. That habit was born from the days when the local butcher and baker and corner supermarkets were small, personal concerns and the people who ran them wanted cash for their sales. It worked pretty well too. Have a look at the level of debt around the world today. And it was greed and credit that caused the financial crisis as well, a few years back, and from which many countries have not as yet recovered.
If you meet people today or have a group of friends, it’s more than likely that one or more of them declared bankruptcy to get out of a bad financial situation. It’s an easy route as long as you are going through a reputable bankruptcy attorney near Harrisburg PA or in your region to sort this out for you. They even gave it a new name – insolvency. What about celebrities declaring insolvency but somehow still driving a fancy car and living in a multi-million quid mansion? What’s that all about?
To fix the problem of declaring bankruptcy as an easy out, businesses which are your creditors, can set up a trust deed that all parties agree to and they get at least some of the debt repaid. Some is far better than none. If you have debts over 5000, you can apply to have a trust deed drawn up by your creditors and in which you agree to pay back what you can afford. The remaining amount is written off. You avoid becoming insolvent and your creditors get some money back. It’s a win/win in a way although the fact remains that you overspent. Or as Grandad says, the money coming in has to be more than the money going out. And that is how it should work all the time. Don’t spend what you can’t afford.