What is insolvency and what do you need to know?

November 19, 2021

What is insolvency? 

 

Insolvency is the term used for an individual or a company which can no longer pay their financial obligations, amounting to a build up of debt. Typically when faced with insolvency that business or the individual involved will be aware of their financial distress and contact creditors, beginning the process to restructure their debts in order to pay them off. 

 

Legal action will be taken against said individual or company, with assets belonging to either or both facing the process of being liquidated to pay off the money owed. This occurs when having open discussions with creditors, where together they will create a plan to show how cuts can be made, or items liquidated, to limit overheads and repay obligations. 

doing accounts

 

What can cause insolvency to happen? 

 

Sadly, there are a number of causes of insolvency. In the case of a business, this is often due to inadequate hiring management, particularly in regards to accounting or human resource positions. However, there are external, personal issues, which can complicate matters and can make the prospect of debt and financial hardship an inevitability. 

 

Elite Business Magazine has highlighted ten potential causes for insolvency: 

 

  1. Cash Flow
  2. Lack of reliable financial information
  3. Failing to separate business and personal accounts
  4. Existing debts
  5. Poor budgeting
  6. Demands for payment or defaulting 
  7. Lack of debt recovery procedure
  8. Competition – ignoring your market and losing out on market share
  9. An over reliance on small client base
  10. Ignoring the issue

 

Each issue highlighted above is as serious as the next. But if you are feeling overwhelmed, rather than ignoring it you should speak to experts and get quality insolvency support in Devon. 

 

What is the difference between insolvency and bankruptcy?

 

Some can get a little confused when discussing insolvency and bankruptcy, but they are two different things. Insolvency is a form of financial distress, whereby a business or an individual can longer pay their bills or obligations they are tied to. 

 

Whereas bankruptcy is a court order depicting how an insolvent person or business will pay off their creditors, or alternatively liquidate assets. Therefore, you can be insolvent without actually being bankrupt. This is not a guarantee, as if your situation remains for a long time with no improvement it can eventually lead to bankruptcy. 

 

Whether you are an individual or someone with a business experiencing some form of financial discomfort, you should speak to the team at Kirk Hills today to see what we can do to help. 

Image Credit: Scott Graham

What is insolvency, what causes it, and is it different to bankruptcy? Find out in the latest blog from your local chartered accountants, Kirk Hills.

Our recent blogs

COVID-19: Job Retention Scheme Payroll Portal Open

April 12, 2020

Yesterday saw the launch of the CJRS portal through the government gateway, HMRC have stated that the portal can cope with high levels of traffic and that claims will be paid six to ten days after submission.

Full Article

Changes To Directors’ Salaries

April 25, 2020

The advice regarding Directors’ salary for 20/21 has altered, please read the information below direct from our team of accountants. When it comes to tax-efficient salary levels for 20/21 there are now three national insurance thresholds you need to be aware of.

Full Article

COVID-19: Understanding Government Business Measures

April 6, 2020

Amongst a range of measures introduced by the Government amid the Coronavirus, recent communication has alluded to the sense that additional measures to assist ratepayers with business rates will be unveiled. The details of these measures are yet to be revealed, however, we have detailed all of the given information to date below.

Full Article

Tax Free Motoring: Even More Reason to Consider Electric Cars

September 30, 2019

Having already given employers and employees an incentive to switch to electric vehicles, the Government has extended its new zero-emission vehicle policy even further. The latest change means that there will be a 0% benefits in kind rate for electric cars throughout 2021/2022.

Full Article