A common question posed to bankruptcy attorneys is “what is insolvency and how is it different from bankruptcy”. While the two terms are commonly interchanged, there are some subtle differences. For those who have fallen on hard times and find that you can’t pay your bills as they arise, you are referred to as being insolvent. Bankrupt on the other hand, is a term used to describe someone who has actually filed a petition for bankruptcy protection under the US Bankruptcy Code.
How to tell if You’re Insolvent
Having debt doesn’t necessarily make you insolvent, nor does missing a payment or two. In fact, more creditors will offer at least one month of extra credit or “grace period”. With this in mind, if you’re a couple weeks behind on paying a bill, you’re not insolvent. Essentially, you are considered insolvent if your liabilities exceed your assets, which is why this type of debt is sometimes referred to as “balance-sheet insolvency”. When your assets, including income, do fall drastically short of the amount of debt you owe, you have many options a debtor. On a positive note, statistics show that individuals who are severely behind on their bills are very seldom ever sued over the debt, but it can happen. It is typically not worthwhile for a credit card company to cancel a card right away as the companies can instead let interest mount up at a higher rate than it has to pay on the money it borrows.
What should I do if I’m Insolvent?
What you should do about insolvency depends on how serious your debt situation is. If you can’t pay your bills you can attempt to enter into a voluntary agreement with your creditors with which you have fallen behind on payments. When negotiating with creditors you have two strategies: attempt to decrease the total balance or stretch out the period of time allowed for repayment of the debt. If attempts to renegotiate your debt fail by way of either still not being able to make the renegotiated payments or the creditor is unwilling, then declaring bankruptcy in a federal court is your next option.
Can Bankruptcy cure Insolvency?
The answer to the “can bankruptcy cure insolvency” question is a resounding yes. When you declare bankruptcy most of your debts can be discharged or wiped out. In the US Bankruptcy code, there are exemptions that can prevent the bankruptcy trustee assigned to manage your bankruptcy proceedings from selling certain property such as your home (up to a certain equity amount), life insurance, clothes, tools used for business, and retirement accounts. If, after looking over your own personal balance sheet, you have discovered you are insolvent and have already attempted to negotiate your debt to no avail, it’s time to contact your Dayton bankruptcy attorney to see if filing for bankruptcy protection is a logical next step.