Bankruptcy vs. Insolvency

— Other — 2 minutes read

Hopefully, if you are a well-informed investor, you already know that investing has its benefits but also its downfalls. This week’s blog post will focus on two possible negative exits of a company: bankruptcy and insolvency.

Many people often mix up the terms “insolvency” and “bankruptcy,” thinking that they mean the same thing. However, these two words actually have different meanings.

The financial state - Insolvency

Insolvency is the financial state that often prompts a company to file for bankruptcy. In other words, insolvency is when a company can no longer meet financial obligations with lenders. This situation can arise from a number of factors, from poor cash management, a reduction in cash inflow forecasts, from an increase in expenses, or sudden unforeseen costs.

Often before formally becoming insolvent, a company can negotiate alternatives with creditors, such as delaying repayment of loans. If a business owner plans to restructure the company’s debt, there must be a realistic plan to reduce company overheads, including cost reductions, while continuing to carry out business operations. 

Insolvency can be the first step on the way to liquidation of bankruptcy. Liquidation occurs when a company sells their assets, pays off creditors, distributes any remaining assets to the partners or shareholders and then dissolves the business. 

The legal process - Bankruptcy

Bankruptcy is a legal proceeding involving a business that is unable to repay its outstanding debts. 
In case of bankruptcy, the assets of the company are sold to pay debts. According to law, in the case of a bankruptcy shareholders are the last to be reimbursed, after debtors and other parties. Shareholders therefore may or may not recover their investments either partially or completely. 

In theory, filing for bankruptcy can benefit the economy overall, it gives people and businesses a second chance. And, the company can move on, to rebound and better plan for the future. 

All of us at MyMicroInvest want to be sure that our investors consider their own individual risks so be sure to read the full descriptions of each investment to fully understand the risks and process of investing in equity crowdfunding.