The words “insolvency” and “bankruptcy” are sometimes used interchangeably. While related, they are actually different concepts. Some, but not all, people who are insolvent file bankruptcy. And some, but not all, people who file bankruptcy are insolvent.
Insolvency is the situation in which one’s liabilities outweigh one’s assets. Many people who are insolvent live paycheck to paycheck and can comfortably service their debt by making payments each month. Determining insolvency is pretty easy:
1 – Determine the value of your assets. Be sure to consider everything you own, including the value of your retirement funds, pension, and other nontaxable assets.
2 – Subtract the amount you owe to all creditors, including your mortgage holder and any 401(k) loans.
3 – If the resulting dollar amount is negative, you’re insolvent. If it’s positive, you’re solvent.
Some people who are insolvent choose to file bankruptcy, many others do not. Being insolvent does not mean that you can’t afford to make payments on your debts. It is simply the end result of the above calculation.
Bankruptcy is the legal process of filing a bankruptcy petition and schedules. A bankruptcy filer may be insolvent, but insolvency is not a requirement for filing. Many of my clients have assets in excess of their liabilities (i.e. they are solvent), but do not have the cash flow necessary to make their monthly credit card payments.
In summary, insolvency is a condition and bankruptcy is a remedy to that condition.
If you are insolvent, you should consider speaking to a bankruptcy attorney to see if filing bankruptcy makes sense in your individual situation. If you’re not insolvent, but are finding it difficult to pay your bills each month, a visit with your friendly neighborhood bankruptcy attorney might also be in your best interests.
Bankruptcy attorneys from around the country are taking part in this “Bankruptcy Alphabet” exercise. Please take a few minutes to check out these other blog posts on the letter “I.”
In Forma Pauperis – by Colorado Springs Bankruptcy Attorney Bob Doig
Income – by New York Bankruptcy Lawyer, Jay S. Fleischman
Income – by Marin County Bankruptcy Attorney, Catherine Eranthe
Income Tax Refunds – by Michigan Bankruptcy Lawyer, Christopher McAvoy
Indentured Servant – by Detroit Bankruptcy Attorney Kurt O’Keefe
Independent Contractor – by Big Island Bankruptcy Attorney, Stuart T. Ing
Injunction – by Lakewood, Ca Bankruptcy Lawyer, Christine A. Wilton
Insiders – by Los Angeles Bankruptcy Attorney, Mark J. Markus
Insiders – by Metro Richmond Bankruptcy Attorney, Mitchell Goldstein
Instant – by San Francisco Bankruptcy Attorney, Jeena Cho
Insurance – by Pittsburgh Bankruptcy Attorney, Shawn Wright
Internal Revenue Service – by Livonia Michigan Bankruptcy Attorney, Peter Behrmann
Investigate Your Options – by Philadelphia Bankruptcy Lawyer, Kimbery Coleman
Investment Property – by St. Louis, Missouri Bankruptcy Attorney, Nancy Martin
Involuntary Bankruptcy – by Cleveland Area Bankruptcy Lawyer, Bill Balena
Involuntary Petition – by Omaha/Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
IRA’s, Pensions, etc. – by Philadelphia Suburban Bankruptcy Lawyer, Chris Carr
IRS – by Northern California Bankruptcy Lawyer, Cathy Moran
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