In business, we often hear the term insolvency and bankruptcy. Sometimes, these two terms are used interchangeably because of confusion between these two terms. Therefore, let us first be clear about what insolvency actually means.

Insolvency is defined as not having access to enough cash to pay current bills and other financial liabilities during the process of operating the business. Insolvency may occur even if total assets or more than liabilities in case those assets could not be sold immediately for cash to pay debts which are becoming due.

You may consider and bankruptcy are two similar terms. But, that is not so. Legally, they are two different terms. Legally, a creditor may invoke some additional rights if the debtor is considered to be insolvent. Insolvency may lead to bankruptcy for a company. A company could be declared bankrupt by a court in a legal procedure. When a company is declared bankrupt, some protection is provided to the debtor against the claims of the creditors. But, in case of insolvency, there is no such protection.

When a company becomes insolvent and cannot solve its financial problem, it may be forced either to become bankrupt, or to go into receivership or forced to liquidate all assets. When you find yourself insolvent, you can solve the problem either by raising additional cash or by finding ways to refinance or to renegotiate the debt.

Any insolvent corporate body could solve their problem by issuing additional stocks or bonds. Incidentally, these bonds are called as "junk" bonds because of poor their credit rating. They could also utilize their existing line of credit or negotiate the loans. A few ingenious options are also available. They are: to raise cash by selling assets like buildings and machineries and then take them on lease, sell receivables (i.e. money owed like fees billed but not yet collected) at a discount. Sometimes, a bigger company may like to take over your company in spite of your financial difficulties because of your reputation or ownership of great products.

An individual could recover from the condition of insolvency either by refinancing home mortgage loan, if he/she still has some equity or by transferring credit card balance to another card offering lower interest rate or by taking personal loan. In case, you could get some cash or could postpone paying debts, then you may have to declare yourself bankrupt to protect yourself from creditors.

This article has tried to give you some understanding about insolvency. For better understanding, you might consider consulting any professional handling insolvency practitioner service.