The terms insolvency and bankruptcy may appear to be the same but have different meanings. Insolvency is a financial state where an individual or a company is unable to off debt on time while bankruptcy is a legal action trying to solve insolvency. Insolvency occurs when cash inflow is less that cash out flow and liabilities are greater than assets. An individual or business in the state of insolvency will attempt to solve their issues through filing for bankruptcy. This is a legal declaration of inability to pay off debts.
We can have reorganization or liquidation bankruptcy declared by the insolvent individual. In reorganization bankruptcy, debtor meets the creditor’s requests for a restructure of the debt to make it easily. Whereas in liquidation bankruptcy, debtors sell off some of their assets to meet the obligation.