In most cases, ""insolvent"" merely refers to the inability to pay ongoing debts and obligations. Examining the word's Latin roots reveals its straightforward meaning: it is derived from the Latin terms in """"not"""" and solventem """"paying."" Insolvent merely denotes the inability to pay one's debts. It has additional meanings, such as when your liabilities exceed your assets. However, these other definitions always lead to the same conclusion: you can no longer pay your debts.
The term """"bankrupt"""" merely indicates that a person's financial system has failed. The term originates from the Latin or Italian phrase banca rotta, which translates literally as ""broken bench."" If you recall early merchants or banks (think of movies with a marketplace or Jesus overturning tables in the temple), you will recall that all financial transactions were conducted on a bench or table in the marketplace. In such a circumstance, the bench is """"broken"""" because it no longer provides reliable payments. The bench has been closed; obligations can no longer be fulfilled from the bench. In Italian and Spanish, the term ""Bancarotta"" is virtually identical to its English counterpart, ""bankruptcy.""
The terms insolvent and bankruptcy are typically used in legal contexts as the official declaration and remedy for a person whose finances have completely collapsed. The purpose of registering for bankruptcy - typically under Chapter 7, 11, or 13 - is to restore the debtor's financial health.
Another essential distinction between the terms """"Insolvency"""" and """"Bankruptcy"""" is the situation's permanence or impossibility. Insolvency may be temporary, whereas bankruptcy typically denotes an imminent or impending collapse: this is an impossible situation.
A person or entity could become """"insolvent"""" at some point (unable to meet obligations or with liabilities exceeding assets) and then recover through an infusion of outside funds or cautious economic planning for the future.
Generally, if a person or organization is """"bankrupt"""" or declares bankruptcy, it has exhausted all other reasonable options for resolving its financial situation. Their economic system is collapsing or will in the near future. The economic situation is nearly insurmountable: the """"broken"""" table (or bench) upon which they transact business. They require something to repair the ""table"" on which they conduct business.
In conclusion, insolvency and bankruptcy share a great deal of similarity: both involve the inability to repay debts. However, insolvency refers to the present condition of an entity or individual. Insolvency is more of a permanent condition: the complete collapse of the financial system. If the system is damaged (insolvent), then no regular procedure can fix it.
Bymasterbankruptcy.com contains additional bankruptcy-related resources.
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