| Definition |
A legal process where a person or business declares inability to repay debts. |
A financial state where liabilities exceed assets or one is unable to pay debts. |
| Nature |
Legal status granted by a court. |
Financial condition; may or may not lead to legal action. |
| Initiated By |
Debtor or creditors can file a petition in court. |
Can be identified by the company or person themselves. |
| Process |
Involves filing in court, appointing a trustee, and liquidating assets if needed. |
No formal process unless it leads to bankruptcy. |
| Result |
May lead to discharge of debts or reorganization under law. |
May be resolved informally, or escalate to bankruptcy. |
| Scope |
Only applies to individuals and businesses under specific laws. |
Applies to any entity facing financial difficulty. |
| Involves Court? |
Yes, it's a legal proceeding. |
Not necessarily; can be a private or financial matter initially. |
| Types |
Chapter 7, Chapter 11, Chapter 13 (in U.S. context); liquidation or resolution. |
Cash-flow insolvency, balance-sheet insolvency. |
| Legal Consequences |
Credit rating damage, asset seizure, public record. |
No legal consequence until a bankruptcy is filed. |
| Recovery |
May take years; involves legal discharge or payment plans. |
Can be resolved quickly if debts are renegotiated or paid. |
| Purpose |
To give a fresh financial start or orderly debt resolution. |
Signifies warning to take corrective action. |
| Example |
A business files for bankruptcy protection under law due to mounting unpaid loans. |
A business can't pay salaries or loan installments due to poor cash flow. |
| Control |
Controlled by court-appointed officials. |
Still under control of the business or individual until legal action is taken. |
bankruptcy vs insolvency