WHAT IS THE DIFFERENCE BETWEEN BANKRUPTCY AND INSOLVENCY?

DIFFERENCE BETWEEN BANKRUPTCY AND INSOLVENCY?Insolvency is a state in which the person or company is unable to repeatedly fulfill its obligations, usually its payments, but not only.

  • Bankruptcy

Bankruptcy is a state in which the debtor is responsible for more debt than the amount of assets he owns. A company or bankrupt person is not automatically insolvent.

  • Bankruptcy

Bankruptcy is a state in which the debtor is responsible for more debt than the amount of assets he owns. A company or bankrupt person is not automatically insolvent.

Examples: 

Bankrupt, NOT insolvent.

A student asks for a loan to finish the course.

  • At the end of the course you must (for example) € 25,000, and you have nothing of your own. He’s broke!
  • The total of your debts is greater than the total of what you have.
  • But it is not insolvent!
  • In fact, it fulfills all its commitments on time.
  • You pay the rent on time, and you still don’t have to pay the loan.
  • In a few years time he will start working and with the new salary he will pay the future installments of his current debt in a timely manner.

It is bankrupt but it is NOT insolvent.

I nsolvência by Responsibilities (not debt)

Insolvent, NOT Bankrupt.

A builder built a building worth 2 million euros.

  • He borrowed EUR 1 million and paid off all suppliers.
  • He’s rich! You have 2 M € and you only owe 1 M €. It is far from bankrupt!
  • However, he was unable to sell any apartments (suppose).
  • At the end of the month you are unable to pay the monthly installment of € 1,000.
  • This is repeated for three months and the bank declares it insolvent.
  • The goods go to the square and the debts are paid.
  • What is left is the entrepreneur.

It is rich but insolvent.

  What is the use of BANKRUPTCY in an INSOLVENCY process?

  • Society or Company?
  • Company or Establishment?
  • Business or Establishment?
  • Extinction or Dissolution?


Fundamental Differences

  • Partner or Manager?
  • Fact or Law Manager?
  • Guarantor or Guarantor?
  • Merchant or Person?

 

Legal definition of insolvency

The legal definition is stamped in the law of each country. It does not vary with the opinion of any economist. Thus, in each country these words have a distinct and precise legal meaning.

In Portugal, CIRE, in article 3, nº 1, defines the state of insolvency.

CIRE: Article 3: Insolvency situation

1 – A debtor who is unable to fulfill his overdue obligations is considered insolvent.

 

Paragraphs 2 and 3, on the other hand, speak of bankruptcy in the context of those who ask for insolvency against a debtor. Unfortunately, until 2004, lawyers confused the term ‘bankruptcy’ with the term ‘insolvency’, see the old CPREF.

As jurists dictate the laws, economists had to come up with the term “ technical bankruptcy ” to avoid using the term bankruptcy, which until the introduction of CIRE in 2004 was legally confused with the current insolvency concept.

See here the concept of “Technical Bankruptcy”

Only more recently since lawyers have stopped using the word bankruptcy have economists been able to stop using the term “technical bankruptcy” and go back to using the word bankruptcy.

However, economics students can rest assured, because in all languages ​​the economic meaning of bankruptcy remains the same, whether they study for a Portuguese or an English book.

 

Accounting during insolvency

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JUDGMENTS & Insolvency

Judgment applicable to the most insolvent aspects of your taxation,
plans and exemption.

 

Legal definition of insolvency

Recalling the definition of BANKRUPTCY, in various branches of knowledge;

o – In Economics and Accounting, bankruptcy is defined as follows.

BANKRUPTCY: when the asset is greater than the liability

o – Let us see then what this article of the Insolvency Code says , CIRE;

 

CIRE; Article 3 nº3; 

3 – The provision of the preceding paragraph ceases when the asset is greater than the liability ,
assessed in accordance with the following rules:… [etc…]

Taking a public balance sheet of the debtor company, it is easy to see whether the company is in technical bankruptcy or not. This concept is essential when filing and justifying an insolvency claim against debtor third parties.

Because insolvency proof is very difficult and can only be done using internal company documents. Therefore, it became almost impossible for a third party, a creditor, to prove that a debtor company is insolvent, without this article 3, paragraph 3, of CIRE.

Briefly, for the Creditor to defend itself against a conversion:
– A creditor must demonstrate that he is in good faith when he asks for a debtor’s insolvency,
– At a minimum, the Creditor must demonstrate that the allegedly insolvent debtor is bankrupt,
– Then debtor who defends himself by proving his solvency.

 

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