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Here at Salient Insolvency, we deal with all matters relating to business and personal insolvency including bankruptcy proceedings. Many people use these terms interchangeably but it is important to note that being insolvent is not the same as being bankrupt. In law, they are strictly defined terms. That said, it is still quite common for people to mix the two terms up and mean one when they say another. Find out what distinguishes insolvency from bankruptcy by reading on.

What Is Insolvency?

To begin with, insolvency isn’t an official status that a person or a business can have. What the term refers to is the financial circumstances of a company or an individual. Essentially, you are insolvent when you do not have sufficient income to discharge your debt obligations. Commonly, this will come about because of a poor cash flow situation. In other words, if you are late being paid or you have not been paid enough for the work you have done or services you have rendered, then you might not be able to pay your rent, pay your employees, service a loan repayment or anything else.

Of course, being insolvent could be a temporary situation. If so, you might just need some help to restructure your debt or to ask for a little more time from your creditors to pay them. This is often perfectly possible because most people and institutions you owe money to will see it as being in their interests to support you even if it means taking longer to get paid. After all, this is better than you defaulting on debt and them not being paid at all.

Nevertheless, more structural issues can also cause more serious cases of insolvency, sometimes referred to as balance sheet insolvency. If you have negative equity in your home and suddenly face reduced household income so you can’t make your mortgage payments, for instance, then this might be the case. Businesses that spend more to produce goods than they can sell them for will also face this form of more structural insolvency. In such cases, seeking a formal bankruptcy status may be an appropriate way forward.

What Is Bankruptcy?

Bankruptcy is a legal process that only applies to individuals in the UK. Insolvent businesses can go into administration, face winding-up petitions or enter into voluntary liquidations. In addition, directors of businesses that have ceased trading due to insolvency can apply for bankruptcy. This will entail you having to declare all of your assets. Anything that is considered to be non-essential can be sold in order to pay off your creditors. However, any debts you have over and above the assets you have will usually be cancelled by an official bankruptcy order. Deciding to go down this route may restrict what you can do in business, so it is a step you should seek professional advice on before proceeding.

Please note that individuals that need personal debt support can also apply for Debt Relief Orders, or DROs. Often considered to be mini-bankruptcy orders, DROs are an option worth considering when dealing with personal insolvency. People with rent arrears, credit card debt and so on may find that seeking a DRO order is more suitable than bankruptcy proceedings but it very much depends on individual circumstances.

When you have completed the web form with all of your details, the bankruptcy application will not be immediately approved. Instead, the application will go to someone at the Insolvency Service known as an adjudicator. A decision will then be made about whether the application has been successful. Adjudicators are allowed up to 28 days to make their decision. If approved, you will be formally notified and an official receiver will then be appointed to go through your case. If the adjudicator turns down your application, then your only option is to appeal the decision and ask for it to be reviewed. This must be done within 14 days of the decision being made, however, or it won’t be considered.