What is bankruptcy, is it the same as insolvency and what does it mean if someone declares themselves bankrupt?


Bankruptcy is a legal process that involves writing off some of someones debts if they cannot pay them off.

Everyone has heard of people being declared bankrupt but it's not as simple as simply having no money.

Here's all you need to know about the complex way people get their debts written off.

What is bankruptcy?

Bankruptcy is a legal status whereby debts cannot be repaid.

In the UK being bankrupt is limited to applying to individuals but in the US and some other countries it can be applied to companies as well.

The word itself is derived from the Italian phrase banca rotta meaning "broken bank".

In the modern world it normally involves a restructuring of debts in an attempt to rehabilitate those who owe the money and sometimes continue with their business.

In most jurisdictions people or companies are declared bankrupt by a court order.

Is it the same as insolvency?

Bankruptcy is just one type of insolvency in the UK.

There are two legal definitions of insolvency in the UK with one being where a business or individual’s liabilities (what you owe) exceed your assets (what you own), or, where you are unable to pay your debts as they fall due.

Additionally there are several different types of insolvency, only one of which is bankruptcy, these include:

  • liquidation (applies to a limited company or partnership)
  • administration (applies to a limited company or partnership)
  • company voluntary arrangement (applies to limited companies)
  • partnership voluntary arrangement (partnerships)
  • individual voluntary arrangement (individuals who can also be made bankrupt)
  • debt relief order (where an individual owes less than £15,000)

Source: https://www.thesun.co.uk/money/5044383/what-is-bankruptcy-is-it-the-same-as-insolvency-and-what-does-it-mean-if-someone-declares-themselves-bankrupt/