What’s the Difference Between Bankruptcy and Insolvency?

When considering bankruptcy, you may wonder if insolvency might be a better description of your situation. Understanding the difference between bankruptcy and insolvency can be difficult, though. As an example, you can go through insolvency without declaring bankruptcy, but you are always considered insolvent while going through bankruptcy.

If that confuses you, you’re not alone. Here’s a little bit more about each of these scenarios that will help you determine which describes your current situation:

What is Insolvency?

Simply put, insolvency is the inability to pay owed debts. This is actually the scenario that bankruptcy is designed to assist with. There are other solutions to insolvency, including:

  • Increasing income to pay down debts
  • Borrowing money to decrease debt
  • Negotiation of debts with creditors
  • Creation of a settlement plan

To further complicate matters, there are two primary types of insolvency. The first is known as cash-flow insolvency. This refers to a scenario in which a debtor cannot make payments toward their debt because of a lack of funds.
The second type of insolvency is referred to as balance sheet insolvency. This describes a scenario in which debt exceeds a person’s assets.

Insolvency is often a catalyst for further financial difficulties. While you can remain insolvent for some time without consequence, eventually, creditors will take measures to collect on debts owed. When this happens, property can be seized, wages garnished, and lives severely impacted.

When to File for Bankruptcy

Bankruptcy is a final destination for those who are dealing with insolvency. It is often the best and only choice for resolving major debts. Those who owe more than they have the cash flow or assets to cover are best suited for bankruptcy. In other words, if you find that selling all of your assets and putting your entire disposable income toward the debt still would not cover the total cost, you are a prime candidate for bankruptcy.

Those filing for bankruptcy will be required to prove that they are experiencing insolvency. An attorney can help you understand how to do this so that your bankruptcy case goes more smoothly and is more likely to be successfully discharged.

If you’re still not sure if bankruptcy or insolvency is where you are, consult the Phoenix, AZ bankruptcy lawyers at the office of Larry P. Karandreas. We can help you choose a scenario that will work best for you – and help you understand the process along the way!

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