What is the difference between bankruptcy and insolvency?

David Kirk, insolvency practitioner, offers an overview of the two processes.

In short, bankruptcy only applies to an individual, not a partnership entity or limited company. Insolvency, on the other hand, is a global term that’s used to describe all types of financial failure.

Bankruptcy is just one of the various types of personal insolvency; others include individual voluntary arrangements, debt relief orders and debt management plans.

Individuals and bankruptcy

An individual, whether in business, employed or unemployed, can be declared bankrupt if they owe more than £5,000 to any creditor. This process is called a ‘creditor’s petition’, and can take between a month and two months to complete.

To speed up the process, an individual can also apply to the court in order to make themselves bankrupt. This process can be as quick as only a week to two weeks, and is known as a ‘debtor’s petition’. To undertake a debtor’s petition, you must pay court fees of about £800 to make yourself bankrupt; this will stop creditors from contacting you direct.

Bankruptcy usually lasts for a year if you cooperate with the official receiver or your trustee in bankruptcy. It is worth noting that until you are made bankrupt, bailiffs can still call at your door to attempt to take goods.

As a licensed insolvency practitioner, I often see people who want to avoid bankruptcy, but who soon realise that it may be a sensible option for them.

Types of insolvency       

There are two legal definitions of insolvency:

  • Where a business or individual’s liabilities (what you owe) exceed your assets (what you own).
  • Where you are unable to pay your debts as they fall due.

There are a few different types of insolvency, of which only one type is bankruptcy. Under the insolvency regime, there are various possible types of financial failure, including:

  • 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)

About the author

David Kirk is a chartered accountant and licensed insolvency practitioner based in the south west. Follow @kirksinsolvency or visit www.kirks.co.uk.