The Difference between Insolvency and Bankruptcy

Many people often mix up the terms “insolvency” and “bankruptcy,” assuming them to mean the same thing. However, these two words, though similar, actually have different meanings. Simply speaking, insolvency is a financial state of being – one that is reached when you are unable to pay off your debts on time. Bankruptcy, on the other hand, is a legal process that serves the purpose of resolving the issue of insolvency.


Insolvency is essentially the state of being that prompts one to file for bankruptcy. An entity – a person, family, or company – becomes insolvent when it cannot pay its lenders back on time. In general, this occurs when the entity’s cash flow in falls below its cash flow out. For individual debtors, this means that their incomes are too low for them to pay off their debts. For companies, this means that the money flow into the business plus and its assets are less than its liabilities.

Typically, those who become insolvent will take certain steps toward a resolution. One of the most common solutions for insolvency is bankruptcy.


Bankruptcy is a legal declaration of one’s inability to pay off debts. When one files for bankruptcy, one obliges to pay off what is owed with help from the government. In general, there are two main forms of bankruptcy – reorganization and liquidation bankruptcy. Under reorganization bankruptcy (Chapter 13), debtors restructure their repayment plans to make them more easily met. Under liquidation bankruptcy (Chapter 7), debtors sell certain assets in order to make money they can use to pay off their creditors.

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If you are insolvent and believe that filing for bankruptcy is the best way to resolve this, then the Birmingham bankruptcy attorneys of [firm-name] can help. To receive a free initial consultation and begin righting your finances today, contact our offices by dialing [phone-number].

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