Archive for September 2014

What Is Insolvency? Insolvency Vs Bankruptcy

The concept of “insolvency” is many times used interchangeably with the concept of “bankruptcy.” Both terms carry the same basic concept of no longer being able to repay one’s debts. Although it may be “splitting hairs,” there is a slight distinction between these two terms.

“Insolvent” almost always simply means that an individual can no longer pay ongoing debts and obligations. A look at the word’s Latin origin reveals its simple meaning: it comes from the Latin words in “not” and solventem “paying.” Insolvent simply means that you can no longer pay your debts. It does have other definitions, such as your liabilities exceeding your assets. But, these other definitions always take you back to the same result: you simply can no longer pay your debts.

“Bankrupt” simply means that one’s financial system has been broken. The term comes from the later Latin or Italian phrase banca rotta which literally means “broken bench.” If you think back to early traders or banks (think of movies with a market place or Jesus turning over the tables in the temple), you will remember that bankers and traders did all of their financial business on a bench or table out in the market place. In such a situation, the bench is “broken” because you can no longer get reliable payments from it. The bench has been shut down for business: obligations can no longer be met from the bench. In Italian and Spanish, the terms is still exactly the same today, “Bancarotta,” and very similar in English: Bankruptcy.

Another distinction is that the terms bankrupt and bankruptcy are usually used in legal settings as the official declaration and remedy for when one’s finances have completely broken down. A bankruptcy filing – usually under Chapter 7, 11, or 13 – is specifically designed to repair the broken financial condition of the debtor.

Another primary distinction between the terms “Insolvency” and “Bankruptcy” is very simple: the permanency or impossibility of a situation. Insolvency could be temporary but Bankruptcy usually implies an either imminent or future crash: it’s an impossible situation.

A person or entity could be “insolvent” at some time (unable to meet obligations or liabilities exceeding assets) but then repair the situation through outside infusion of funds or by careful future economic planning.

Generally, if a person or entity is “bankrupt” or declares bankruptcy, they have exhausted all other reasonable remedies for repairing the economic situation. Their economic system is either crashing or will crash in the future. The economic situation is close to impossible: the table (or bench) in where they conduct their business is “broken.” They need something to repair the “table” where they conduct their finances.