The words “insolvency” and “bankruptcy” are often used interchangeably but mean two very different things. Whilst both words carry negative connotations and the inference of an inability to pay bills on time, they each describe different circumstances and have different consequences for individuals who are struggling to pay their debts.
This article seeks to explain the differences between insolvency and bankruptcy and the implications of each for individuals experiencing financial difficulty.
Put simply, personal insolvency is an individual’s inability to pay their debts as and when they fall due. Whilst insolvency appears, at least on its face, to be a relatively straightforward concept, the act of establishing insolvency or defending an allegation of insolvency can be complex and, in some cases, can require expert analysis.
The causes of personal insolvency can be many and varied. For example:
Insolvency is a state that many individuals find themselves in from time to time. In fact, statistics recently published by the Australian Financial Security Authority reveal that there were 10,621 new personal insolvencies in Australia in the financial year ended 30 June 2021.
Whilst insolvency is a state people can often experience only temporarily, if it is not dealt with promptly and the financial circumstances quickly improved, it can have drastic consequences for individuals who have a protracted inability to pay their debts.
Bankruptcy is a legal process whereby a bankruptcy trustee is appointed to control an insolvent individual’s property and financial affairs with a view to releasing the bankrupt from most of their debts, providing relief, and allowing them to make a fresh start. The trustee’s role is to realise the bankrupt’s assets for the benefit of unsecured creditors and conduct investigations into the conduct of the bankrupt.
Bankruptcy is a legal option an individual may wish to consider if they are facing prolonged personal insolvency.
The main difference between personal insolvency and bankruptcy is that whilst personal insolvency refers to an individual’s financial state, bankruptcy refers to an individual’s legal state. If a person is insolvent, they are unable to pay their debts as and when they fall due and, if this is the case, it will become important for them to look at the options available to them to address their insolvency, one of which is declaring bankruptcy before one of their creditors applies to the court to have them declared bankrupt.
There are also a number of other formal legal options available to insolvent individuals to help them get their finances under control aside from bankruptcy. For further information on the other options available for insolvent individuals (aside from bankruptcy), please click here to read our article entitled “What happens when a business becomes insolvent?”
The consequences of personal insolvency vary depending on the seriousness of the individual’s financial difficulties and the action taken by the insolvent individual. For example, overdue payments can be recorded on an individual’s credit file and can have a negative impact on their credit score. Whereas the consequences of bankruptcy for insolvent individuals can be much more significant. For example:
If facing insolvency, it is important that you know your options. You should seek advice from your financial and legal advisors upon determining that you may be insolvent. By acting early, and prior to creditors taking adverse action, you will be maximising your prospects of a better outcome.
The Coulter Legal Litigation & Dispute Resolution team have significant experience acting for insolvent individuals and both for and against bankruptcy trustees.