Insolvency, Bankruptcy & Liquidation

By Author: Paul Smythe
Total Articles: 10
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Insolvency, bankruptcy and liquidation are the three terms that people generally have a tendency to use interchangeably. But, each connotes specific meaning that creates a different impact on the concern related. Typically, all the troubles begin with insolvency, may extend to bankruptcy, which might end up in liquidation.

When the business entity fails to pay the amount due to the creditors, it is considered insolvent. Insolvency also emerges when the fair market value of the assets fall a lot lower than the liabilities revealed in the balance sheet. When a business entity is declared as insolvent, it can employ the existing cash reserves to pay off the creditors or may sell some of its assets to get over the situation. Insolvency can be caused by the external factors like the unfavorable government policies, general market condition, higher market rates, as well as internal elements like inefficient management, unsuccessful products and services, etc. Insolvency need not always result in bankruptcy.

Bankruptcy arises when the creditors or the company files to the United States Bankruptcy Court for bankruptcy, ...
... wherein the federal law governs procedure to be followed and the state laws dictate the property rights. When the debt problem arises beyond a limit, the creditors may invoke a bankruptcy procedure to compensate for the loss incurred by them. As a solution to bankruptcy, the business entity might be offered with the solution of restructuring or liquidation. Restructuring can be formal restructuring or informal restructuring. Informal restructuring might involve the sale of assets, merger, scaling down the creditors' claims, reduction in the number of employees and much more. When the government is convinced of the economic need for continuing the business entity, it might take up the responsibility of offering the funds for restructuring besides taking up the role of the trustee in controlling the business operations. An insolvency practitioner is in a better position to understand the various options available and in making the best pick from them. His knowledge and skills give him a better insight into bankruptcies, liquidation and restructuring.

But, where the economic viability of running the business is very low, under Chapter 7, the company's assets will be sold off and the proceeds properly redistributed. The proceeds from the sale of the assets are utilized for the repayment of the dues outstanding on the creditors account. While in bankruptcy the ownership gets transferred to the bondholders, in liquidation the company assets are completely disposed, resulting from its exit from the market.

The author of this article has dealt with many Debt Problems. Being an Insolvency Practitioner the author writes great articles on Liquidation and insolvency.