Bankruptcy is a legally declared inability or impairment of ability of an individual or organisations to pay their creditors. Creditors may file a bankruptcy petition against a debtor (“involuntary bankruptcy”) in an effort to recoup a portion of what they are owed. In the majority of cases, however, bankruptcy is initiated by the debtor (a “voluntary bankruptcy” that is filed by the bankrupt individual or organization).

In essence the difference between Bankruptcy and Insolvency can be best described as follows:

Bankruptcy: A legal status, which can be initiated by a creditor or person concerned, whereby the bankrupt’s property is vested in a trustee and, with the exception of certain personal and professional property, is available for distribution to creditors.

Insolvency: A situation where an entity (usually a business corporation) has insufficient assets to cover the value of its liabilities, resulting in an inability to meet its financial obligations as they fall due.

Bankruptcy is the legal status applicable to individual debtors, being natural persons, who, either voluntarily or involuntarily, become bankrupts. In Australia, bankruptcy law is that branch of insolvency law which deals with personal insolvency, and thus bankruptcy refers to the legal status imposed by the Bankruptcy Act 1966 (Cth) upon individuals but not upon corporations. Insolvency in the broad sense covers both corporate and personal insolvency. It includes bankruptcy, but bankruptcy is not necessarily synonymous with insolvency, which receives a limited meaning in bankruptcy law, namely, the inability to pay one’s debts as they fall due from one’s own money.

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