Insolvency facts for kids
Insolvency is a situation where a person or a business doesn't have enough money to pay back all the people they owe. Imagine you have a piggy bank, but you've promised to buy more things than you have coins for!
There are usually two main ways this can happen:
- Cash flow insolvency: This means someone can't pay their debts right when they are due. They might have money coming in later, but not right now.
- Balance sheet insolvency: This means the total amount of money a person or business owes is more than the total value of everything they own (like their house, car, or savings).
When someone is insolvent, the people they owe money to might ask a court to start a process called bankruptcy.
Insolvency and Bankruptcy: What's the Difference?
People often get the words bankruptcy and insolvency mixed up. They sound similar, but they mean different things.
Insolvency is simply the state of not having enough money to pay your debts. It's like being in a tough financial spot.
Bankruptcy, on the other hand, is a formal legal process. It happens in a court. While insolvency can lead to bankruptcy, not everyone who is insolvent will go through bankruptcy. It's a serious step taken when debts can't be managed in other ways.
What Happens if Someone is Insolvent?
Being insolvent can have several consequences, even if it doesn't lead to bankruptcy.
For example, if a company keeps operating when it's insolvent, the people in charge (called directors) might face problems. Laws in many countries protect the public. These laws mean that directors might have to pay back money to the people the company owes. This helps protect businesses and individuals who lent money to the company.
See also
- In Spanish: Insolvencia para niños
