Understanding the distinctions between the terms insolvency, bankruptcy and liquidation is important for making informed decisions and providing valuable guidance to clients. Today, we shed light on these three often used but distinct terms.
1. Insolvency
At its core, insolvency is a financial state where an individual or entity is unable to meet their financial obligations as they become due. It’s a situation many may face and it’s essential to recognise it as the starting point for addressing financial difficulties.
2. Bankruptcy
Bankruptcy is a consideration for insolvent individuals. It’s a legal process that provides relief to individuals who can no longer pay their debts. A person can become bankrupt voluntarily by lodging their own debtor’s petition with the Australian Financial Security Authority (AFSA.gov.au). Or they can become bankrupt through court proceedings initiated by one or more creditors owed at least $10,000 (a creditor’s petition).
3. Liquidation
Liquidation, on the other hand, applies to insolvent companies. It’s the process of winding up a business’s affairs, selling off assets, and distributing the proceeds to creditors. This ends with the company’s dissolution.
Why These Differences Matter
Understanding these distinctions is vital, especially for professionals like lawyers and accountants. It enables us to provide tailored advice to clients, whether individuals facing bankruptcy, creditors owed money by someone refusing to pay, or businesses facing liquidation. By recognising these key differences, we can guide people toward the most appropriate solutions to address their own financial situation.
