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Do You Know the Difference Between Insolvency, Bankruptcy and Liquidation?

GeorgetteMillerLaw.com > Bankruptcy  > Do You Know the Difference Between Insolvency, Bankruptcy and Liquidation?

Do You Know the Difference Between Insolvency, Bankruptcy and Liquidation?

Do You Know the Difference Between Insolvency, Bankruptcy and Liquidation

 

When an individual or business faces financial difficulty, terms that are often mentioned include insolvency, bankruptcy and liquidation. Although the three terms are closely related, they actually have very different meanings.

Insolvency

When an individual or company is unable to pay their outstanding debts, they may be considered insolvent. There are two types of insolvency. When you or your company cannot pay your outstanding debts, it is considered a cash insolvency while being unable to set off financial obligations due to excess liability over assets is known as balance sheet insolvency.

Insolvency may not necessarily lead to bankruptcy although every company or person who files bankruptcy is considered insolvent. Insolvency can be rectified through increasing income or reducing expenses rather than filing for bankruptcy.

Bankruptcy

Bankruptcy is a federal court action in which a person or business declares themselves insolvent. In other words, you must prove to the court that you do not have the ability to repay outstanding debt.

One of the methods a court uses during bankruptcy to satisfy creditors is to liquidate the assets of the individual or business. This means that assets you or your company own can be sold in order to obtain the funds to repay creditors.

Liquidation

When a company closes, their assets are liquidated, either sold or redistributed. This can occur both in and outside of bankruptcy. If the company has enough in assets to repay all debts, shareholders in the company are given whatever is left after the debts are paid. If liquidation occurs as the result of bankruptcy, however, it is likely that only creditors will receive any compensation after the assets are liquidated.

Liquidation of a company can get complicated as there are different types of liquidation. Compulsory liquidation is a court ordered action while voluntary liquidation occurs when members of the company resolve to close the business and dissolve.

If you are a business owner and are unable to pay your outstanding debts as agreed, you may be considered insolvent. Contact the Law Offices of Georgette Miller today to learn if bankruptcy protection will help you gain financial footing for your company again or if you should consider liquidating assets and closing the company. You can contact us through our simple online for or give us a call at 1-866-964-6529. We will guide you through the entire process and help you determine what the best solution is for your needs.