Understanding the difference between bankruptcy and insolvency can be difficult, in part because society tends to treat them. They actually deal with two different sides of the same pressing issue: the resolution of debt and insufficient funds.

Definition: Bankruptcy

Bankruptcy is a legal filling, and resolution of a person or businesses debt. It is the legal declarement of an inability to make funds match debt.

Definition: Insolvency

Insolvency is the inability to pay one's debt, or the condition of having a higer amount of debt than asset. If you are allowing bills to fall unpaid until after their due date, or if you are failing to pay them at all, then you are insolvent.

The Difference

Insolvency is the condition, and bankruptcy is a legal action. Insolvency can lead to bankruptcy, but it is not bankruptcy unless a lawyer and judge have become involved.

When to File Bankruptcy

Often, you can get back on track and pay your bills, after an insolvent period, without filing bankruptcy. Filing for bankruptcy is only necessary if you need protection from creditors. It can be used to protect other assets from seizure, if certain other debts become unmanageable.

Insolvent But Current

Technically, you can be insolvent, and have paid every bill on time. Insolvency includes situations where your debt becomes higher than your asset. That means that if you are "upside down" in your house or car, you are technically insolvent, even if you have the money to make the monthly payment.

Source:

Bankruptcy24: Definition Insolvency vs Bankruptcy

biz/ed: Insolvency and Bankruptcy