Insolvency / Bankruptcy

Insolvency

 occurs when firms are unable to settle their debts when they are due because of the lack of funds or cash. A firm CAN recover from insolvency if it takes the measures necessary to tackle its insolvency.

Causes of insolvency

• Cash flow crisis: overspending / debtors who are late paying 

• Loss of customers

• Loss of an important supplier that accounts for significant cost savings

• Financial mismanagement

Bankruptcy

Formal and legal declaration of a firm’s inability to settle its debts. It is the LAST RESORT when all attempts to tackle insolvency have failed. Severely damage the credit rating of the owners of a business, hindering their ability to borrow money for many years ahead

THE DIFFERENCE

• Insolvency is the state of financial distress 

• Bankruptcy: a legal declaration and legal processes culminating in a conclusion